constitution of boards of public sector banks in india

DECEMBER 2011DECEMBER 2011DECEMBER 2011DECEMBER 2011DECEMBER 201117181718171817181718

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Constitution of Boards of Public Sector Banks in IndiaSantanu Kumar Dash*, FCS, Company Secretary, Corporation Bank, Mangalore.

e-mail :[email protected]

Public Sector Banks play a vital role in shaping the financial service sector of thecountry by supplementing the financial needs of the industrial sector particularly SSIand MSMEs. For this banks need to have a dynamic and competent Boards of Directors.Key issues relating to appointment of bank directors have been discussed here.

CONCEPT

Any organization which is permanent in nature requires peoplewith different competencies to man its effective functioning.While the day to day affairs are being streamlined by the wholetime people known as the Whole Time Directors, other directorsare involved in the policy decisions and other important matterswhich affect the destiny of the firm. This is true in the case ofgovernment owned Public Sector Banks (PSBs), banksnationalised through an Acquisition Act by Gazette notificationand acquired by the Government of India from the erstwhileprivately operated owners. These public sector units reflect theimbibed culture and policies of the Government of India.

IMPACT

For the success of any organization effective functioning ofits Board of Directors is a pre-requisite. So an effectivefunctioning of the Board of a public sector bank should becontrolled and monitored professionally and ethically. Withthis in mind Government of India and the Reserve Bank ofIndia have brought out certain directives in this regard.

Corporate Governance compliant Board – Position

Clause 49 of Listing Agreement shall apply to all the listedPublic Sector Banks incorporated under Banking Laws. It doesnot violate the Banking Statute and guidelines or directivesissued by the relevant regulatory authorities. [Vide SEBIcircular dated 29th October, 2004 on the subject.]

The issue of corporate governance in PSBs is important andalso complex.

The listed Public Sector Bank Boards are also required tocomply with requirements relating to composition of the Boardas per Clause 49 of Listing Agreement.

Eligibility for Board Members

A member of the Board should have necessary qualification,experience, professional expertise read with the Complianceto the Banking Companies (Acquisition and Transfer ofUndertakings) Act, 1970/1980 (the Act), The NationalizedBanks (Management and Miscellaneous Provisions) Scheme,1970/1980, The respective Bank (Shares and Meetings)Regulations – after listing of PSB’s Equity Shares in StockExchanges, the guidelines framed by Appointments Committeeof the Cabinet (ACC) and used by the Department of FinancialServices, Ministry of Finance, Government of India-for Nonofficial Directors, Reserve Bank of India Act, 1934, BankingRegulation Act,1949, Fit and Proper Status Guidelines issuedby Reserve Bank of India, etc..

Conflict of Interest

Conflict of interest is a situation in which a director has apersonal interest sufficient to appear to influence the objectiveexercise of his or her duties as Director. So sufficient disclosurebe made to establish that there is no conflict of interest.

In PSB it has been seen that where the Life InsuranceCorporation is a shareholder, say in the case of holding ofLIC is more than 10% in a PSB, LIC is able to place one of itsNominee as a Shareholder Director. Since LIC is 100%holding organization of Government of India, it is indirectlyunderstood that Central Government is sending its*Views expressed are the personal views of the author.

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representative through Shareholder Director route, where, inthe case of election of Shareholder Director Government ofIndia is not having voting right; alternatively the shareholderdirectors are elected by other than Government of India.

Fit and Proper Status

On 1st November, 2007 after the recommendation from Dr.Ganguly Group the Reserve Bank of India under the amendedprovisions of Section 9(3AA) and 9(3AB) the BankingCompanies (Acquisition and Transfer of Undertakings) 1970/1980 issued circular for Public Sector Banks to implement Fitand Proper Status for elected Directors.

This stipulate that every PSB should form a NominationCommittee of the Board out of Independent/non-executiveDirectors of the Bank of at least three members of the Boardto go through due diligence process exhaustively before theelection of shareholder directors and also every year for thesitting directors to evaluate their fit and proper status at theend of the March of every year.

Required Qualification

Since majority of PSBs are listed entities, the desiredqualification of the Directors of PSB should be fixed asminimum Graduate (with certain exception) with specializedknowledge and experience.

QUALIFICATIONS REQUIRED FOR BEINGELECTED AS A DIRECTOR OF THE BANK

In terms of Section 9(3A) of the Act, a candidate being ashareholder of the Bank and who desires to be a Director ofthe Bank shall -

(A) have special knowledge or practical experience in respectof one or more of the following matters namely,-

(i) agricultural and rural economy,

(ii) banking,

(iii) co-operation,

(iv) economics,

(v) finance,

(vi) law,

(vii) small scale industry,

(viii) any other matter the special knowledge of, andpractical experience in, which would, in the opinionof the Reserve Bank of India, be useful to the Bank;

(B) represent the interests of depositors; or

(C) represent the interest of farmers, workers and artisans.

In terms of Section 9(3AA) of the Act, a candidate being a

shareholder of the Bank and who desires to be a Director ofthe Bank should possess ‘Fit and Proper’ status. Further, theelected director should execute the deed of covenants and isrequired to furnish annual declarations as prescribed by theReserve Bank of India in this regard.

Necessary Requirements

Since also the PSBs are listed entities the necessary requirementof Listing Agreement framed by Securities Exchange Boardof India (SEBI) such as Code of Conduct for Directors, Codefor prohibition of Insider Trading, Whistle Blower Policy areto be followed by the Directors on the Board of PSBs.

The Deed of Secrecy and confidentiality is required to besigned by the directors of the PSB on joining the Board formaintaining confidentiality for the office of directorshipincluding the agenda papers distributed to the directors of thePSB, including electronic mode.

The Deed of Covenants is required to be executed with theBank by the non executive directors of PSBs, which coversthe role of directors and services of the PSB to the directors asper the recommendation of Dr. Ganguly Group.

Dos and Don’ts as framed by the Department of FinancialServices, Ministry of Finance, Government of India, ought tobe strictly adhered to.

Present position of Shareholder Director

If the Public Shareholding of a PSB is up to 16%, there is arequirement of one Shareholder Director, if PublicShareholding is above 16% and upto 32%, there is arequirement of two Shareholder Directors and if PublicShareholding is more than 32%, there is a requirement ofthree Shareholder Directors.

At present all PSBs are getting these Shareholder Directorsthrough an election process where the voting power of eachshareholder is restricted to 1% of total number of shares ofthe Bank, i.e. equity Shares. In this process the promoter ofPSB, i.e Government of India is not having the voting power,i.e. the Shareholder Director to be elected from all shareholderother than Government of India shareholder.

The election process is held in a General Meeting of the PSBthrough secret ballot. But the PSB may use the services ofCDSL (the Depository), i.e. electronic voting and this votingmay also be made by postal ballot, which has been followedby the Companies incorporated under the Companies Act,1956. This will result in under participation of shareholders.

But in the election process, institutional shareholders includingthe Foreign Institutional investors who are holding substantialportion of the total shareholdings really influence the poll

Constitution of Boards of Public Sector Banks in India

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process. Since majority of them are holding 1% cap levelshareholding their involvement will not give opportunity tothe minority shareholders who are having small number ofshareholding. To mitigate this PSB should ensure that at leastone Shareholder Director is elected from amongst the minorityshareholders, say the shareholders who are holding EquityShares upto Rs.20000 in face value.

Quorum of the Board & Committee Meetings

As per the provisions of Sub-Clause 5 of Clause 12 of theNationalized Banks (Miscellaneous Provisions) Scheme, 1970/1980, the Quorum for the Board Meeting of the PSB is onethird of total Board Members as on date of the Board Meeting,subject to a minimum of three Board Member, out of whichat least two Directors should be from the category ofGovernment Nominee Director or RBI Nominee Director orPart Time Non Official Director Nominated to the Board bythe Government of India [i.e. directors nominated under theprovisions of Section 9(3)(h) of the Banking Companies(Acquisition of Transfer of Undertakings) Act,1970/1980].This means in every Board Meeting at least two memberspresent must either from the category of Government NomineeDirector or RBI Nominee Director or Part Time Non OfficialDirector Nominated by the Government of India.

Quorum for the Committees of the Board either as per theguidelines or provisions made therein or if not mentionedanything in the guidelines, then the Board has to fix the quorumfor the Committees of the Board.

A Balanced Board & its importance

The concept of balanced members of the board brings aboutmore effectiveness and transparency in the functioning of theBoard. A balanced board, i.e. the persons having SC/ST,Women Director, persons representing agricultural and ruraleconomy, co-operation, small scale industry, represent theinterests of depositors, represent the interest of farmers,workers and artisans, any other matter in relation to the specialknowledge, and practical experience therein, which would beuseful to the Bank.

But it is seen that majority of the Boards of PSBs consist ofProfessional Accountants despite the fact that PSB is having aChartered Accountant Category for Directors. Overcrowdingof one category of professionals defeats the very purpose ofthe vision of a diversified Board with adequate expertise indifferent fields.

Voting power of the Board Members

Each Board Member is having one vote and the Chairman ofthe Board is having a casting or second vote for taking thedecision in the Board or its Committee Meetings if a tie happened.

Total strength of the Board of a PSB

As per the provisions of the Banking Companies (Acquisitionand Transfer of Undertakings) Act, 1970/1980 the Compositionof the Board of Directors of a Nationalised Bank (PSB) mayconsist of following category and number of Directors fromthe respective areas:

Sl. Relevant Designation Nature of appointment No.NO. Section of

the BankingCompaniesAct

1 9(3)(a) Chairman and Managing Director, Appointed by the Central Government 4Executive Director, (As on date (Extrapulated from General Managers of the PSBsthe Government of India first as Executive Director(ED) then as Chairmanconsidering appointment of one & Managing Director (CMD) with certain periodmore Executive Director to that of Service as ED or CMD with retirement age ofPSB which is having Rs.1 lakh 60 years at present)[Whole Time Director(s)]Crore business as on 31st

March.)

2 9(3)(b) Central Govt Nominee An official of the Central Government nominated 1by the Central Government. A non-whole timedirector. (Tenure at the at the Consideration ofthe Government)

3 9(3)(c) Expert in matters relating to Possessing necessary expertise and experience in 1commercial banks. (RBI matters relating to regulation or supervision ofnominee Director) commercial banks, to be nominated by the Central

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Government on the recommendation of ReserveBank. (Tenure at the Consideration of theGovernment)

4 9(3)(e) Director representing the Nominated by the Central Government (for a 1workmen employee of the maximum tenure of three years)respective PSB

5 9(3)(f) Director representing the Officer Nominated by the Central Government (for a 1employee of the respective PSB maximum tenure of three years)

6 9(3)(g) Chartered Accountant Category To be nominated by the Central Government after 1Director consultation with RBI (for a tenure of three years

at a time)

7 9(3)(h) General category To be nominated by the Central Government 3Total No. of Directors – 6 (On election ofShareholder Directors under clause 9 (3) (i),(Maximum of 3), equal number of Directorsnominated under this clause (h) shall retire if thePSB is having Public Shareholding after its IPOand listing thereof in the Stock Exchange. (fora tenure of three years at a time)

8 9(3)(i) From Shareholders of PSB other Persons having “Fit and Proper status”, to be 3than Central Government elected by the shareholders (No. of ShareholderShareholder[voting right of Director is based on public holding of EquityIndividual or single shareholder Shares in the PSB) [a Shareholder Director(even if by consolidating the elected for a period of 3 years and may be reholding of Equity Shares in a elected for another period of 3 years in a PSB]single Permanent AccountNumber issued by the IncomeTax Authority) is restricted to1% of total Equity Shares of thePSB]

Total 15

*(Maximum Directors)

Section 9A of the Act * Appointment of Additional Directors:

1. RBI has to appoint additional director(s) in the interest of banking policy or in the publicinterest or in the interest of that particular Bank or its Depositors.

2. The tenure of Directors shall be 3 years and extendable by further 3 years. For the purpose ofreckoning any proportion of total number of Directors, any additional Director appointedunder this section shall not be taken into account.

Section 18 A of the Supersession of Board of the Bank:

Act Where the Central Government, on the recommendation of the RBI, is satisfied that in publicinterest or for preventing the affairs of the Bank being conducted in a manner detrimental to theinterest of the depositors or the Bank or for securing the proper management of any Bank, it isnecessary so to do, the Central Government may, for reasons to be recorded in writing, byorder.

Supersede the Board of Directors of such Bank for a period not exceeding six months as may bespecified in the order.


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The period of supersession of the Board may be extended from time to time, so however, that thetotal period shall not exceed twelve months.

The Central Government may appoint in consultation with Reserve Bank of India for a period asmay determine, an Administrator (not being an Officer of the Central Government or a StateGovernment) who has experience in Law, Finance, Banking, Economics or Accountancy.

Upon making the order of supersession of the Board of Directors of the Bank, The Chairman,Managing Director and other Directors shall, as from the date of supersession vacate their officesas such.

The Central Government may constitute, in consultation with the Reserve Bank a committee ofthree or more persons who have experience in Law, Finance, Banking, Economics or Accountancyto assist the administrator in the discharge of his duties.

Administrator shall call the General Meeting on or before the expiration of two months before theexpiry of the period of supersession of the Board of Directors to elect new Directors and reconstituteits Board of Directors.

considering Fit and Proper Status for Election ofShareholder Directors.

� The independent / non-executive directors should raisein the meetings of the Board, critical questions relatingto business strategy, including loans & recovery policy,housekeeping and internal control systems, record ofexposure to various sectors / industries by way of bothcredit and investment, risk management systems, internalaudit, accounting policy, senior managementdevelopment, other important aspects of the functioningof the bank and investor relations. The good corporategovernance in banks will be sustained by aknowledgeable, skillful and well informed Board ofDirectors with a proper blend of expertise /professionalism, independence and involvement.

� The directors could be made more responsible to theirorganization by exposing them to need-based trainingprogrammes/seminars/workshops to acquaint them withemerging developments/challenges facing the bankingsector.

� The whole-time directors should have sufficiently longtenure to enable them to leave a mark of their leadershipand business acumen on the bank’s performance such asat least for a period of 5 years tenure. So the Governmenthave to consider this factors on appointment of wholetime directors from amongst the General Managers ofthe PSB having at least 12 years remaining services,thereby the PSB should give opportunities to youngergeneration who performed with accuracy, transparencyand of desired speed in settling the desired target orgrowth of the PSB in today’s competitive time.

� Reserve Bank may bring out an updated charterindicating clear-cut, specific guidelines on the roleexpected and the responsibilities of the individual

What is needed for further improvement

� Due diligence of the directors of the PSB, should bedone in regard to their suitability for the post by way ofqualifications and technical, professional expertise. Forassessing integrity and suitability, factors such as criminalrecords, financial position, civil actions undertaken topursue personal debts, refusal of admission to, orexpulsion from professional bodies, sanctions appliedby regulators or similar bodies, and previous questionablebusiness practices, etc. should be considered.

� The appointment / nomination of independent / non-executive directors to the Boards of PSB should be froma pool of professionals and talented people to be preparedand maintained by Reserve Bank of India like candidatesfor Independent Directors list hosted in the website ofDepartment of Public Enterprises, Ministry of HeavyIndustries, and Government of India.

� In the present context of banking becoming morecomplex and knowledge-based, there is an urgent needfor making the Boards of banks more contemporarilyprofessional by inducting technical and speciallyqualified individuals.

� While continuing regulation based representation ofsectors like agriculture, SSI, cooperation, etc, effortsshould be aimed at combining it with the need-basedrepresentation of skills such as marketing, technology& systems, risk management, strategic planning, treasuryoperations, credit recovery, etc., Further, the Boards ofPSBs should also have representation in the areas suchas finance, information technology, human resourcesdevelopment, economics and persons with good trackrecord of experience in managing / advising industrialenterprises. This function of selection be also given toNomination Committee of the Board of PSB while

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directors including that of Whole Time Directors in thePSB.

� The existing level of remuneration paid (by way of sittingfees, etc.) to directors of PSB also require re-consideration. To attract qualified professional peopleto their boards, and expect them to discharge their dutiesas per the mutually agreed covenants, the level ofremuneration payable to the directors should also becommensurate with the time required to be devoted tothe bank’s work as well as to signal the appropriatenessof remuneration to the quality of inputs expected from amember. The remuneration of the directors may alsoinclude the form of stock option.

� It would be desirable to separate the office of Chairmanand Managing Director in respect of large sized publicsector banks. This functional separation will bring aboutmore focus on strategy and vision as also the neededthrust in the operational functioning of the topmanagement of the bank.

� The statutory prohibition under section 20 of the BankingRegulation Act, 1949 on lending to companies in whichthe director is interested, severely constricts availabilityof quality professional directors on to the Boards of bankssubject to full disclosure and appropriate covenants. Thiswould require a change in the existing legal framework.

� The information furnished to the Board should bewholesome, complete and adequate to take meaningfuldecisions. A distinction needs to be made betweenstatutory items and strategic issues in order to make thematerial for directors ‘manageable’.

� Every PSB should appoint a qualified CompanySecretary as the Secretary to the Board for monitoringand reporting compliance with various regulatory /accounting requirements.

� The Chairman of Audit Committee need not necessarilybe a Chartered accountant but can be a person withknowledge on ‘finance’ or ‘banking’ so as to providedirections and guidance to the Audit Committee, sincethe Committee not only looks at accounting issues, butalso the overall management of the bank.

� Alternate Director Concept is not available in the PSBs;it may be allowed in exceptional circumstances, forexample when the Government Nominee Director is onforeign tour for a shorter duration say for 3 months ormore, to enable the PSB to hold its Board Meeting withavailability of Quorum.

� Similar to the requirement of Chartered Accountantcategory Director in the Board of a PSB, there shouldalso be a Qualified professional from Company Secretary

category as Director in PSB who will be useful to theBank in matters of law, corporate governance and legalcompliances.

� Informal discussion among Independent Directors ofPSB should be made at or before Board or CommitteeMeetings for better understanding.

� Secretarial Standards issued by the Institute of CompanySecretaries of India should be followed by PSB for bettermanagement of the Boards of PSB.

� As recommended by the Tarapore Committee, all Bankswhether in Public Sector or Private Sector should bebrought under an umbrella of legislation, like theCompanies Act, 1956.

� The distribution of agenda and communication amongBoard members by PSB be IT system driven most likelyof real time or virtual basis through a dedicated webserver with search engine disability and withconfidentiality, which will save time in getting agendaearly by the Directors to read and understand and fordiscussion in the Board Meeting.

� Electronic made of communications should be resortedfor sending agenda etc. to Board members to save timeand also provide more time to the recipients.

� Board Meeting of PSBs could be permitted to beconducted through Video Conferencing for quickdecision making.

CONCLUSION

In the light of what have discussed it is to be borne in mindthat effective controlling and monitoring of PSBs needs verydynamic board members who have expertise in diversifiedfields consisting of Education, Cooperation, SSI, Industry,finance, Law etc. Expertise of this collaborative group willdefinitely contribute much to the growth of the organization.While selecting/electing directors care should be taken in seeingthat over filling of any particular group should be avoidedand different sections as stipulated should be evenly distributed.

To equip the director with a competitive edge proper needbased training should be given and exposure through seminars,interactions etc. need to be provided.

Whole rime director’s tenure should be at least for a period ofthree to five years to enable them to render fruitful service tothe organization.

A pool of professional and talented people should be preparedand maintained by the Reserve Bank of India for consideringthe appointment of Independent Directors.

Sufficient time be given to each director to study the agendain a more critical way and analyze their presentation. �


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constitution of boards of public sector banks in india

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