The Hindu Business Line : Appointment of directors in public sector banks — Will governance be a casualty of impracticable provisions?

Opinion - Public Sector Banks
Money & Banking - Insight
Appointment of directors in public sector banks — Will governance be a casualty of impracticable provisions?

S. N. Ananthasubramanian

When banks are transforming themselves into financial conglomerates, the unseemly haste with which the Government introduced the `equitable' amendments has left many perplexed.

Public sector banks (PSBs) enjoy a unique legal status by virtue of an Act of Parliament, The Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 and 1980.

Banks are neither incorporated nor registered under the Companies Act, 1956 as they are corresponding new entities of banks that were registered under the Companies Act, before nationalisation. The Banking Companies Act provides for a mechanism through which a bank's board of directors is appointed, nominated and elected from various constituents of shareholders.

Section 9(3) of the Banking Companies Act, amended in 1994, provides for:

(a) not more than two whole-time directors, to be appointed by the Central Government after consultation with the Reserve Bank of India,

(b) one director who is an official of the Central Government,

(d) not more than two directors to be nominated by the Centre from SEBI, Nabard or public financial institutions specified from time to time under Section 4-A of the Companies Act and other institutions established or constituted by or under any Central Act or incorporated under the Companies Act and having not less than 51 per cent paid-up share capital held or controlled by the Central Government,

(e) one director from among the workmen,

(f) one director from among the non-workmen,

(g) one director who is a chartered accountant with not less than 15 years' experience,

(h) not more than six directors to be nominated by the Centre, subject to Section 9(3). Clause (i), which says that where the capital issued by the bank is (1) not more than 20 per cent of the total paid-up capital, there need be not more than two directors, (2) more than 20 per cent but not more than 40 per cent of the total paid-up capital, not more than four directors, and (3) more than 40 per cent of the total paid-up capital, not more than six directors to be elected by the shareholders, other than the Central Government from among themselves.

Altered structure

The Banking Companies (Acquisition and Transfer of Undertakings) and the Financial Institutions Laws (Amendment) Bill, 2005 (enacted and notified on September 26, 2006 in the Official Gazette) curiously sought to alter the basic structure of Section 9(3) (i), outlined above, by replacing it with the following clauses: Where the capital issued by the bank is (1) not more than 16 per cent of the total paid-up capital, not more than one director, (2) more than 16 per cent but not more than 32 per cent of the total paid-up capital, not more than two directors and (3) more than 32 per cent of the total paid-up capital, not more than three directors to be elected by the shareholders, other than the Central Government from among themselves.

The amended Act also contains a quixotic provision, by virtue of which if, in a listed PSB, there are directors in excess of the amended provision who are already elected before the commencement of the amended Act, they shall retire in a manner specified in the Nationalised Banks (Management and Miscellaneous Provisions) Scheme, 1970/1980 (Scheme) and that they shall not be entitled to claim any compensation for the premature end of their term of office.

The amended Act also provides for appointment of four whole-time directors in PSBs against two whole-time directors earlier and deletion of the clause providing for nomination of directors under Section 9(3)(d), as indicated above.

Reversal of SEBI norms

A careful reading of the underlying objects and reasons for such amendments, as provided in the Bill, indicates the Government's resolve to provide for a more equitable representation (sic) on the boards of listed PSBs, on the basis of percentage of ownership in such banks. Funnily, though, it does not provide adequate explanation for the sudden alteration of the percentages of the promoter/public holding in PSBs, which has resulted, in a complete reversal of corporate governance norms enunciated by SEBI, as indicated below.

The Centre's holding in listed PSBs currently varies from 51 per cent to 80 per cent of the total paid-up capital and the banks have, over a period, had the benefit of the experience and expertise of eminent and knowledgeable persons as shareholder directors.

As envisaged in the Act, the Scheme provides for compulsory retirement of excess directors in listed PSBs, on the basis of an extraordinary criterion, that is, the longest serving director. And if two or more directors have served for the same length of time, the older among the two shall retire first!

As a consequence of this amendment many PSBs have had the embarrassment of compulsorily retiring directors of eminence.. One also feels flummoxed that the Government has abrogated the shareholders' fundamental rights to remove a director elected by them.

At a time when banks are transforming themselves into financial conglomerates and moving towards international benchmarks of governance and with several obligations cast on them, the unseemly haste with which the Government introduced these measures has left many perplexed. It appears as though the Government pushed through this extraordinary step when it realised that it could have no nominees under clause (h) with public shareholding increasing in most PSBs upon its dilution and crossing 40 per cent!

Non-compliance with Clause 49

Coincidentally, SEBI has, in its recent draft amendments to Clause 49 of the Listing Agreement, proposed that nominees of government/public financial institutions are not to be considered independent directors. If these amendments were to go through, PSBs would find themselves in a piquant situation where there will be an overwhelming preponderance of directors, either appointed or nominated by the Government, with the result that the composition of the board would never be compliant with that proposed by Clause 49 of the Listing Agreement in relation to independent directors.

PSBs can argue that Clause 49 cannot anyway be made applicable by virtue of a saving clause in the said Clause 49, which states that the Clause would not apply to entities governed by any specific statute.

In fact, by making this amendment, the Government has ensured that Clause 49 cannot be complied with and that listed PSBs, irrespective of the level of public holding, will continue to be adjuncts of the government.

It also needs to be noted that the Cabinet recently approved the guidelines on corporate governance in public sector enterprises (PSEs), listed or not, which are very similar to the provisions contained in Clause 49.

No wonder, it is often said that government and governance are mutually exclusive, both in form and in content. Who will bite the bullet, the Government or SEBI?

(The author is a Mumbai-based banking consultant.)

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