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Private sector banks, including City Union Bank, AU Small Finance Bank, Bandhan Bank, Equitas Small Finance Bank, IDFC First Bank and Kotak Mahindra, could see significant changes, going by the Reserve Bank of India’s discussion paper on corporate governance and setting up of an internal working group to review guidelines on ownership and corporate structure.
“We believe the term cap of 10 years may impact the term of Uday Kotak, promoter-cum-Managing Director and CEO of Kotak Mahindra Bank, ending in December 20 and Sanjay Agarwal of AU SFB (recently incorporated in 2017),” said Emkay Global Financial Services in a recent report.
“Kotak Bank might be affected more as Kotak has completed 17 years as CEO and term may end by September 2022 or April 2023. Other banks affected may be Federal and RBL Bank albeit with a lag,” Jefferies said in a note. According to the note by Emkay Global Financial Services, lenders like City Union Bank, Bandhan Bank, Equitas Small Finance Bank and IDFC First Bank could also be impacted by this move.
What RBI proposed
In in a discussion paper on corporate governance in commercial banks, the RBI has, among other things, proposed a maximum continuous term of 10 years for a whole-time director (WTD) or CEO who is either a promoter or a major stakeholder, and 15 years for others. It has also proposed the upper age limit for CEOs and WTDs of banks at 70 years.
The proposed reforms come at a time when lenders like YES Bank and Punjab and Maharashtra Cooperative Bank have seen a crisis at the top management.
“The move will help professionalise management and separate ownership from management. Banks like Kotak Mahindra Bank and Bandhan Bank will get impacted as owners, and promoters are MDs and CEOs. But overall banking guidelines need a rethink in terms of ownership,” said Shriram Subramanian, Founder and MD, proxy advisory services firm InGovern, adding that it will help in better succession planning.
However, JN Gupta, founder, SES, a shareholder advisory firm noted, “Skin in the game is required for running the bank or company. The RBI should instead consider issues of conflict of interest and strengthening of independent directors to improve corporate governance unless it feels that 50 per cent of independent directors are not sufficient. Boards are not akin to a court or judicial system where 100 per cent independence is required,” he noted.
The RBI’s internal working group on ownership and corporate structure of private sector lenders is expected to help in a comprehensive review “taking into account key developments over the years which have a bearing on the issue” and help harmonise the norms applicable to banks set up at different time periods.
In the recent past lenders like Kotak Mahindra Bank, Bandhan Bank and IndusInd Bank have been in the spotlight over ownership norms. While Kotak Mahindra Bank promoter Uday Kotak even went to the court on norms for dilution of promoter stake, IndusInd Bank had sought approval from RBI to raise their stake to 26 per cent. Meanwhile, Bandhan Bank undertook a merger with Gruh Finance to meet the norms.
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