The Reserve Bank of India has given a breather to private sector banks’ managing director and CEO or Whole Time Director (WTD), who are also promoters, allowing them a tenure of up to 12 years instead of 10, proposed earlier. Also, in extraordinary circumstances, at the sole discretion of the RBI, such an MD and CEO or WTD may be allowed to continue up to 15 years.

The RBI’s discussion paper on governance in commercial banks in India (issued in June 2020) had indicated that 10 years is an adequate time limit for a promoter/major shareholder of a bank as WTD or CEO of the bank to stabilise its operations and transition the managerial leadership to a professional management. Besides the tenure, the central bank’s circular also underscored that the committees of boards of banks should either comprise only Non-Executive Directors or majority of NEDs.

Further, the RBI asked banks to ensure that the chair of the board is an independent director and at least half of the directors attending the meetings of the board should be independent directors. The RBI asked banks to comply with its instructions latest by October 1, 2021.

“The guidelines are in line with the discussion paper and markets have had time to prepare for it. In terms of norms for committee composition, the RBI had tried to align it with the Companies Act. However, on the issue of the tenure of the CEO and Managing Director, the RBI has not made a durable case on its approach. Our view has been that the RBI should exercise discretion rather than one size fits all,” said Amit Tandon, Founder and Managing Director of corporate governance and proxy advisory services, IiAS.

Tenure of MD & CEO

Overall, subject to statutory approvals required from time to time, the central bank said the post of the MD & CEO and WTD cannot be held by the same incumbent for more than 15 years. Thereafter, the individual will be eligible for re-appointment as MD & CEO or WTD in the same bank, if considered necessary and desirable by the board, after a minimum gap of three years, subject to meeting other conditions.

During this three-year cooling period, the individual shall not be appointed or associated with the bank or its group entities in any capacity, either directly or indirectly.

According to RBI’s instructions, while examining the matter of re-appointment of such MD & CEOs/WTDs within the 12/15- year period, the level of progress and adherence to the milestones for dilution of promoters’ shareholding in the bank shall also be factored in by the RBI.

The RBI said no person can continue as MD & CEO or WTD beyond the age of 70 years.

Independent markets commentator Srinath Sridharan said: “The new rule of tenure cap for CEO/WTDs (promoter or not) would be interesting to note from the perspective of younger individuals who are associated with the banks.

“Mathematically, looking at this rule in conjunction with 70 years being the max age limit for such roles, anyone lesser than 55 years of age and getting into these roles would have a long runway.”

Transition arrangement

The RBI has allowed a transition arrangement, whereby banks with MD & CEOs or WTDs who have already completed 12/15 years as MD & CEO or WTD, on the date these instructions coming to effect, will be allowed to complete their current term as already approved by the RBI.

Further, the chair of the board who is not an independent director on the date of issue of this circular will be allowed to complete the current term as Chair as already approved by the RBI.

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