RBI tightens norms for appointing directors on board of PSU banks

The government may find it difficult to appoint people close to the ruling party as elected directors on the boards of public sector banks (PSBs), going by Reserve Bank of India’s new directions on ‘fit and proper’ criteria.

As per the Reserve Bank of India (‘Fit and Proper’ Criteria for Elected Directors on the Boards of PSBs) Directions, 2019 , all the banks — SBI and nationalised banks — are required to constitute a Nomination and Remuneration Committee (NRC) consisting of a minimum of three non-executive directors from amongst the board of directors.

Of these non-executive directors, not less than one-half shall be independent directors and should include at least one member from the Risk Management Committee of the board, for undertaking a process of due diligence to determine the ‘fit and proper’ status of the persons to be elected as directors.

The Government of India nominee director and the director nominated under Section 19(f) of the SBI Act/Section 9(3)(c) of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970/1980 should not be part of the Committee. With these two directors kept out of the NRC, those with political connections may not be able to get on to PSB boards as elected directors.

As per the directions, the candidate who wants to become an elected director should at least be a graduate. He/She should be between 35-67 years old as on the cut-off date fixed for submission of nominations for election. The candidate should have special knowledge or practical experience in areas useful for banks.

An elected director shall hold office for three years and shall be eligible for re-election, provided that no director hold office for a period exceeding six years, whether served continuously or intermittently.

In the disqualifications, the directions state the candidate should not be a member of the board of any bank, RBI, Financial Institution (FI), Insurance Company or NOFHC (non-operative financial holding company). A person connected with hire purchase, financing, money lending, investment, leasing and other para banking activities cannot be considered for appointment as elected director on the board of a PSB.

Further, no person may be elected/ re-elected on the board of a bank if he/she has served as director in the past on the board of any bank/FI/RBI/Insurance Company under any category for six years. The candidate should not be engaging in the business of stock broking or a partner of a Chartered Accountant firm currently engaged as a Statutory Central Auditor of any nationalised bank or SBI.

When it comes to professional restrictions, the directions say that the candidate should neither have any business connection (including legal, advisory services, etc.) with the concerned bank nor should be engaged in activities which might result in a conflict of business interests with that bank. The candidate should not have any professional relationship with a bank or any NOFHC holding any other bank.

PSBs are required to put in place a system of safeguards, including proper disclosure of the elected CA director’s/his firm’s clients, and not participating in the bank’s credit/investment decisions involving his/firm’s clients. The elected CA director should be required to compulsorily dissociate himself from the entire process and sign a covenant to this effect.

The elected director should make a full and proper disclosure of his interests and directorships in business entities, with the director personally distancing himself from and not participating in the bank’s credit/investment decisions involving entities in which he is interested.

Banks should not allot any professional work to a person who was an elected director of that bank, for a period of two years after demitting office as such director.

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