The Hindu Business Line : New obligations on PSBs

PUBLIC Sector Banks have had a chequered history ever since the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 and the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 came into effect.

While the Act of 1970 came into being as a result of the promulgation of the Banking Companies (Acquisition and Transfer of Undertakings) Ordinance, the Act of 1980 was enacted in Parliament through a normal legislative process.

Both the Acts were meant to provide for the acquisition and transfer of undertakings of certain banking companies based on their size, resources, coverage and organisation to control the heights of the economy and serve theneeds of development in conformity with the national policy.

However, having been enacted as socio-political legislations, in the absence of penal provisions, the Acts of 1970 and 1980, together with their respective schemes, have remained so in essence. Popularly known as Bank Nationalisation Acts, these legislations even today form the backbone of any governance debate in PSBs.

While there were several amendments in the eighties and nineties, in line with the reform agenda, significant amendments to these legislations were made in 1994 by which PSBs were allowed to access the capital markets for the first time. The public issues of Oriental Bank of Commerce, Dena Bank, Bank of India, Bank of Baroda and State Bank of India enjoined upon the PSBs the minimal regulatory requirements of listing. With the further opening of the economy, PSBs such as SBI even accessed foreign capital market through issue of global depository receipts.Thus, the process of reversal of total Government holding to substantial Government holding resulted from the amendments made in 1994.

The advent of corporate governance norms across the globe and the introduction of the recommendations of Kumar Mangalam Birla Committee on corporate governance set up by SEBI in 2000 as Clause 49 of the Listing Agreement further set in motion new obligations to PSBs in terms of transparency and disclosure norms. The recommendations of Narayana Murthy Committee on Corporate Governance were made part of Clause 49 of the Listing Agreement, which required implementation by December 31, 2005. The Listing Agreement entered into with the stock exchange(s) is applicable to all the listed entities. SEBI has made compliance with Clause 49 applicable to PSBs by adding a rider that the clause would be applicable to the extent it does not violate their respective statutes, and guidelines or directives issued by the regulatory authorities. Accordingly, PSBs, which are constituted under the Banking Companies (Acquisition & Transfer of Undertakings) Act, 1970/1980 (Act) and are governed by the schemes made under the Act, the Banking Regulation Act, 1949 and guidelines and circulars issued by Reserve Bank of India (RBI) are in a peculiar position under the Corporate Governance norms.

The salient features of Clause 49 include Composition of the Board, Audit Committee, Subsidiary Companies, Disclosures, CEO/CFO Certification, Report on Corporate Governance and Compliance. Section 9(3) of the Acts of 1970/1980 dealing with the composition of the board of a PSB was introduced in 1994. It already provides for a framework of directors such as two whole-time directors designated as Chairman and Managing Director, Executive Director, a nominee of the RBI, a nominee of the Union Government, a director each from workmen, non-workmen categories, a Chartered Accountant and six more directors to be nominated by the Union Government. Section 9(3)(i) of the Acts 1970/1980 based on the non - Government holding provides for a certain number of directors to be elected from shareholders other than the Union Government. This section discusses the areas of expertise and knowledge, which would be required from shareholder directors. The recent experience indicates that PSB boards have been strengthened with persons of eminence and high specialisation. Boards of PSBs such as Union Bank of India, Bank of Baroda and Bank of India have attracted people who are authorities in their respective fields. As the process of accessing capital markets by PSBs got strengthened, SEBI categorised the Union Government as a promoter, thereby enabling only shareholder directors of listed PSBs to be deemed as independent directors. Under the current regime of Clause 49, directors appointed/nominated by the Union Government are categorised as Promoter Directors and cannot therefore be classified as independent directors. With the economic growth gaining momentum, PSBs' appetite for funds has grown in the last five years and the requirement to comply with BASEL II norms in terms of capital adequacy pushed many PSBs to revisit the capital markets. With the Central Government declaring that the Government holding will not fall below 51 per cent, a dichotomous situation may emerge wherein the non-government holding is expected to increase from the current levels. Curiously enough, an amendment Bill currently pending in Parliament seeks to reduce the number of shareholder directors from the current maximum of six to a maximum of three. The Bill also seeks to increase the number of whole-time directors from the current level of two to four, which could eventually lead to the reversal of corporate governance norms as envisaged in Clause 49 of the Listing Agreement. The dichotomy is further deepened since most PSBs in the near future would have a non-government holding up to a maximum of 49 per cent. The Acts of 1970/1980 contain provisions relating to restricted voting rights to one per cent to shareholders other than the Union Government, thereby creating a mirage of shareholder democracy. Even as the Auditors' Report of PSBs is addressed to President of India who represents the majority shareholder, accounts of PSBs are currently only discussed and not adopted at the annual general meeting. The boards of directors in PSBs declare the dividend, which in due course should be the privilege of the shareholders at the AGMs. In the absence of any specialised regulatory mechanism, some of the PSBs even pay their dividends before the AGMs, which implies that the Acts of 1970/1980 have to be seen essentially as self-regulatory in character. Unlike shareholders holding shares in a physical form in companies under the Companies Act, 1956, shareholders in PSBs do not have the nomination facility. With the regulatory overhang of RBI and the Union Government, the minority shareholders in PSBs do not seem to enjoy the minimal rights available to similar shareholders in companies.

The recent initiatives like managerial autonomy to PSBs, mandatory and non-mandatory provisions such as code of conduct and training to directors are giving a new sense of direction to decision-making and corporate governance in PSBs. Many boards of PSBs have also realised that the voluntary adoption of good corporate practices is today fast becoming a pre-requisite for better valuation of stock prices and enhanced visibility. It also gives room for profitable divestment. With increased holding in PSBs by reputed funds such as CalPERS and other FIIs, PSBs might be subject to more strenuous demands for good governance practices such as transparency, disclosure, fair business dealings, equity approach to stakeholders' interests and social transformation initiatives. The Union Government should also recognise that even if the letter cannot possibly be complied with, the spirit can certainly be salvaged by choosing and appointing the right persons as directors in PSBs, if they have to fulfil the demands emanating from the markets, which are the ultimate arbiters in the game. Perhaps, it would not be a bad idea to go back to the Acts of 1970 / 1980, which were enacted in a different context. Who will do it anyway?

The author is practising Company Secretary

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