Sethuraman Ravi — a name that often crops up during discussions on governance in public-sector banks (PSBs) — has enjoyed unbroken stints on the boards of public-sector banks over the last two decades.
Beginning in the late 1990s, Ravi, a practising chartered accountant (CA), has sat on the boards of UCO Bank, Dena Bank, Union Bank, and IDBI Bank. For his various stints, he entered the boards under different categories — as a chartered accountant, shareholder director, and in case of IDBI Bank, he became an independent director in 2012.
"I have served banks like UCO Bank and Dena Bank, where there were challenges. And by virtue of my experience in these banks, I served the banks’ boards," says Ravi.
Though Ravi is a prominent example, he is not alone. Others who served boards of multiple PSBs include Dharmendra Bhandari, who served as a director of three PSBs for nearly 18 years, and Kawaljeet Singh Oberoi, who served Corporation Bank (2011-14), Syndicate Bank(2007-09) and Bank of Maharashtra(2002-05) as a director.
But then, appointments like this do raise eyebrows.
The way the government chooses and appoints chartered accountant directors has been under the lens for some time now. Since the government directly or through the Life Insurance Corporation of India (LIC) has a say in the appointment of different categories of directors — executive, non-official, shareholder, and chartered accountant — boards often became echo chambers.
In recent months, especially after the Nirav Modi scam hit Punjab National Bank, several ideas, like privatisation, and structural reforms have been floated. While the Reserve Bank of India (RBI) claimed that it does not have enough powers to regulate PSBs, the government, on the other hand, made attempts to explain that the central bank enjoys adequate control.
But former RBI governor YV Reddy recently added a new dimension to the debate.
In his speech at the third anniversary of Bandhan Bank, Reddy said: “PSBs should be either converted into companies and the control should be with the Reserve Bank of India (RBI), or, they should entirely be under the government.” This view has been endorsed by other prominent figures such as Shyamala Gopinath in public forums. Gopinath said the move would open up opportunities for the government to raise capital through various instruments and boost restructuring possibilities.
But would these banks be better governed if brought under the purview of the Companies Act, 2013?
ET Prime scanned through various provisions of existing laws, past instances of resistance by PSBs to be governed by laws that don’t suit them, and talked to experts for an answer.
Current laws silent on governance
PSBs were set up under the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 /80 (BC Act), the law that was used to nationalise the erstwhile banking companies. They are body corporates.
The State Bank of India (SBI) was set up under a separate statute of 1955.
The operational framework is provided in subordinate laws like the Nationalised Bank (Management & Miscellaneous Provisions) Scheme 1970/80, individual bank’s (shares and meetings) regulations, and circulars issued by RBI and the government from time to time.
These laws do not provide adequate provisions for governance or compliance. PSBs have over a period of time developed practices or customs either carried forward from their earlier avatar or adopted from practices followed by other similar entities or peers, say company law experts.
"Initially, PSBs did not have share capital. They used to be funded through recapitalisation bonds. When the first bank came for listing, an amendment was made in 1995 to issue shares. Now, if they have to move to the Companies Act, they have to incorporate and transfer the undertaking to the new entity," says SN Viswanathan, a senior professional.
The Companies Act, 2013, is a modern, contemporary legislation enabling companies to perform their corporate functions with ease and at the same time creating an environment for self-regulation and compliance. Critical aspects such as composition of board, qualification, appointment and functions of independent directors, penalties for violations, and day-to-day functioning have been streamlined through various provisions under the new law.PSBs, which were companies in their previous avatar, have to deal with situations which are similar to corporates.
Bhargavi Zaveri, senior researcher, Indira Gandhi Institute of Developmental Research, is convinced that moving to the Companies Act will be the first step before meaningful reforms can be carried out in the banking sector. “… moving to a more transparent structure under the Companies Act will be the first step.” She believes this will help increase disclosures and information flow to shareholders.
According to Viswanathan, at present banks do not have codified laws to follow on several matters. "They borrow what is convenient. The moment a provision doesn't suit them, they say this does not apply to them."
Listed, but securities regulations don’t apply
A couple of years ago, when the market regulator, Securities and Exchange Board of India (Sebi), made e-voting for shareholders compulsory under its listing obligations and disclosure requirements (LODR) regulations, India’s largest bank SBI, a listed entity, had refused to allow remote e-voting, saying physical presence of shareholders is required. It had cited the 1955 Act, under which it was set up.
However, while implementing changes in electronic communication to shareholders, the bank cited LODR.
How do government banks sneak away from LODR despite being listed?
The Sebi (Listing Obligations & Disclosure Requirements) Regulations, 2015, which replaced the erstwhile listing agreement, has the answer.
Regulation 15 of LODR states that “for listed entities which are not companies, but body corporate or are subject to regulations under other statues, the provisions of corporate governance as specified in Regulations 17 to 27 and 46(2) and Schedule V shall apply to the extent that it does not violate their respective statutes and guidelines or directives issued by the relevant authorities.”.
Banks use this to their convenience.
There are more such cracks such as the composition of a board, which is governed by the Nationalisation Act and does not conform to the requirements of LODR. PBSs are exempted from Regulation 17 to 27 of LODR to the extent that are practically exempt from the stringent corporate-governance provisions of LODR.
The fear of foreign control
Reddy in his speech said if banks are incorporated under the Companies Act, the government will acquire flexibility to buy or sell its shareholding without parliamentary approval. Under the Banking Acquisition and Transfer of Undertaking Act, foreign capital cannot exceed 20%.
In fact, when the National Securities Depository Limited (NSDL) and the Central Depository Services Limited (CDSL), both share depositories in India, were asked to monitor the limits under the Foreign Exchange Management Act, PSBs refused to register themselves, saying they were governed by the banking act, which caps it at 20%.
On the other hand, once a bank comes under the Companies Act, there will be no cap, and this will open up foreign investments and could even result in re-rating of these banks by investors. At present, private banks such as ICICI Bank can have up to 100% foreign capital.
Experts believe that considering India is a socialist economy, we would not want 100% FDI in PSBs because it will defeat the whole purpose of the government controlling the bank. "Shifting the control to merely one statutory body might open the banking industry to other challenges. Moreover, a change of jurisdiction to other companies will not solve the problem of dual control unless shareholding of government is diluted," says Atif Farooqi of Duff & Phelps.
According to Anil Girotra, former executive director at Andhra Bank, if those banks still have 51%-plus government holding and are like public-sector companies where the government exercises control over appointments including that of boards, “I don’t think it will have any significant difference from the present position.”
The governance regime in PSBs is complex. “They are subjected to supervision by RBI and overall accountability to constitutional and statutory authorities and the governance regime applicable to the listed companies,” says L Viswanathan, partner and chair – finance and projects, Cyril Amarchand Mangaldas.
Recommendations fall on deaf ears
The multiplicity of regulations has already been identified as one of the causes of ill performance by PSBs by many committees in the past, follow up to which always remained a question. A look at the recommendations will sum it up.
Narasimham Committee, 1991
The committee, in one of its recommendations, emphasised that RBI should become the only regulator of PSBs.
The committee added that given that the government nominees to the board are members of Parliament, bureaucrats, and politicians, they often interfere in the affairs of banks. Hence, it suggested reduction of government equity.
Successive governments led by different political parties have not implemented this particular recommendation, says Reddy.
PJ Nayak Committee, 2014
The committee identified that PSBs face inconvenience due to multiple regulations by RBI as well as the government. It, therefore, recommended reduction in the government’s shareholding in order to reduce its interference in functioning of banks and making RBI as the sole regulator.
It also recommended that the government repeal some of the laws such as the Banking Nationalisation Act( 1970, 1980), the SBI Act, and the SBI Subsidiaries Act, as these acts require the government to keep more than 50% shareholding, and appoint the chairman and managing director and the board of directors.
Once those acts are repealed, government should set up a bank investment company (BIC) under the Companies Act, 2013, as a core investment company and transfer its shares in PSBs to BIC.
Then all PSBs should be registered as subsidiary companies of BIC under the Companies Act so that the latter can have autonomy and the power to appoint board of directors and take other policy decisions.
Nayak declined to comment for this story, saying his recommendations are several years old and he has been pursuing interests outside banking.
Reddy told ET Prime that he did not wish to add to the points he has made in his recent speech.
Counterview: Dual control works fine
“In a way, the credit flow from banks to the private sector is also indirectly controlled by the government. These are politically economic benefits of dual control. Much of the problem of NPAs and frauds observed in the banking sector is a result of interface between politics and business,” Reddy said in his speech.
Further addressing the problem of dual control, Reddy added, “The dual-regulation problem seems to have dual views.” He suggested that the government can reduce its role as an owner and strengthen its role as a regulator. Secondly, the government can fund broad activities, leaving the ownership and operations to the private sector.
However, some people who have been in the system, say the change would not mean much and recommend status quo.
“Changing them into companies is not a solution. Once these banks are brought under the Companies Act, the concept of limited liability would prevail, which would make deposits of the general public unsecured. People will lose their confidence in the banking structure, which is not good for a country like us,” says trade union leader Devidas Tuljapulkar.
On dual control, he says, “The government and RBI have their own defined roles in the public-banking structure and they both are equally important. However, the problem surfaces when the government, instead of giving directions, interferes in the affairs of banks, and RBI as a regulator comes into the picture only when something wrong happens.”
Ravi, whose consecutive stints in state-owned banks raised eyebrows, says, “Suppose, if you give complete control to RBI, including appointment of directors, the case would be that they will be the one appointing the directors and they will also be the one supervising. Does it not become a conflict? The same goes for the government. So, this whole mechanism is well thought of.”
Also, PSBs take the burden of financing government policies, loan waivers, and bailout packages on their shoulders. They have to contribute to policy objectives and other commitments of its owner in addition to commercial goals. “The government is providing capital and anybody who is providing capital would anyway put a condition. I think it’s fine,” says Ravi.
Looking at the fate of several recommendations in the past, even if the government decides to reduce its control, the path seems long and winding. The proposal has to be first presented in Parliament, which could send it to a committee for evaluation. The committee would then recommend it to Parliament for its final approval.
“It seems impractical [to replace the existing governance mechanism in PSBs], given our constitutional and statutory framework. Further, the assumption that extending the governance regime of the Companies Act will per se improve governance is itself questionable, given the examples of governance falling short of expectations in companies under the Companies Act,” says Viswanathan of Cyril Amarchand Mangaldas.
The way forward: a middle path
Experts say that even without a fresh incorporation under the Companies Act, its provisions can be made applicable to banks, as these fall under the term “body corporate”. According to sub-section 4(f) of the Companies Act, provisions of the act can be made applicable to body corporates that are incorporated by any act for the time being, as the central government may, by notification, specify in this behalf, subject to such exceptions, modifications, or adaptation, as may be specified in the notification.
Even though the option of a middle path exists, ultimately it boils down to the will and wishes of the government, the owner of these banks.
Beginning in the late 1990s, Ravi, a practising chartered accountant (CA), has sat on the boards of UCO Bank, Dena Bank, Union Bank, and IDBI Bank. For his various stints, he entered the boards under different categories — as a chartered accountant, shareholder director, and in case of IDBI Bank, he became an independent director in 2012.
"I have served banks like UCO Bank and Dena Bank, where there were challenges. And by virtue of my experience in these banks, I served the banks’ boards," says Ravi.
Though Ravi is a prominent example, he is not alone. Others who served boards of multiple PSBs include Dharmendra Bhandari, who served as a director of three PSBs for nearly 18 years, and Kawaljeet Singh Oberoi, who served Corporation Bank (2011-14), Syndicate Bank(2007-09) and Bank of Maharashtra(2002-05) as a director.
But then, appointments like this do raise eyebrows.
The way the government chooses and appoints chartered accountant directors has been under the lens for some time now. Since the government directly or through the Life Insurance Corporation of India (LIC) has a say in the appointment of different categories of directors — executive, non-official, shareholder, and chartered accountant — boards often became echo chambers.
In recent months, especially after the Nirav Modi scam hit Punjab National Bank, several ideas, like privatisation, and structural reforms have been floated. While the Reserve Bank of India (RBI) claimed that it does not have enough powers to regulate PSBs, the government, on the other hand, made attempts to explain that the central bank enjoys adequate control.
But former RBI governor YV Reddy recently added a new dimension to the debate.
In his speech at the third anniversary of Bandhan Bank, Reddy said: “PSBs should be either converted into companies and the control should be with the Reserve Bank of India (RBI), or, they should entirely be under the government.” This view has been endorsed by other prominent figures such as Shyamala Gopinath in public forums. Gopinath said the move would open up opportunities for the government to raise capital through various instruments and boost restructuring possibilities.
But would these banks be better governed if brought under the purview of the Companies Act, 2013?
ET Prime scanned through various provisions of existing laws, past instances of resistance by PSBs to be governed by laws that don’t suit them, and talked to experts for an answer.
Current laws silent on governance
PSBs were set up under the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 /80 (BC Act), the law that was used to nationalise the erstwhile banking companies. They are body corporates.
The State Bank of India (SBI) was set up under a separate statute of 1955.
The operational framework is provided in subordinate laws like the Nationalised Bank (Management & Miscellaneous Provisions) Scheme 1970/80, individual bank’s (shares and meetings) regulations, and circulars issued by RBI and the government from time to time.
These laws do not provide adequate provisions for governance or compliance. PSBs have over a period of time developed practices or customs either carried forward from their earlier avatar or adopted from practices followed by other similar entities or peers, say company law experts.
"Initially, PSBs did not have share capital. They used to be funded through recapitalisation bonds. When the first bank came for listing, an amendment was made in 1995 to issue shares. Now, if they have to move to the Companies Act, they have to incorporate and transfer the undertaking to the new entity," says SN Viswanathan, a senior professional.
The Companies Act, 2013, is a modern, contemporary legislation enabling companies to perform their corporate functions with ease and at the same time creating an environment for self-regulation and compliance. Critical aspects such as composition of board, qualification, appointment and functions of independent directors, penalties for violations, and day-to-day functioning have been streamlined through various provisions under the new law.PSBs, which were companies in their previous avatar, have to deal with situations which are similar to corporates.
Bhargavi Zaveri, senior researcher, Indira Gandhi Institute of Developmental Research, is convinced that moving to the Companies Act will be the first step before meaningful reforms can be carried out in the banking sector. “… moving to a more transparent structure under the Companies Act will be the first step.” She believes this will help increase disclosures and information flow to shareholders.
According to Viswanathan, at present banks do not have codified laws to follow on several matters. "They borrow what is convenient. The moment a provision doesn't suit them, they say this does not apply to them."
Listed, but securities regulations don’t apply
A couple of years ago, when the market regulator, Securities and Exchange Board of India (Sebi), made e-voting for shareholders compulsory under its listing obligations and disclosure requirements (LODR) regulations, India’s largest bank SBI, a listed entity, had refused to allow remote e-voting, saying physical presence of shareholders is required. It had cited the 1955 Act, under which it was set up.
However, while implementing changes in electronic communication to shareholders, the bank cited LODR.
How do government banks sneak away from LODR despite being listed?
The Sebi (Listing Obligations & Disclosure Requirements) Regulations, 2015, which replaced the erstwhile listing agreement, has the answer.
Regulation 15 of LODR states that “for listed entities which are not companies, but body corporate or are subject to regulations under other statues, the provisions of corporate governance as specified in Regulations 17 to 27 and 46(2) and Schedule V shall apply to the extent that it does not violate their respective statutes and guidelines or directives issued by the relevant authorities.”.
Banks use this to their convenience.
There are more such cracks such as the composition of a board, which is governed by the Nationalisation Act and does not conform to the requirements of LODR. PBSs are exempted from Regulation 17 to 27 of LODR to the extent that are practically exempt from the stringent corporate-governance provisions of LODR.
The fear of foreign control
Reddy in his speech said if banks are incorporated under the Companies Act, the government will acquire flexibility to buy or sell its shareholding without parliamentary approval. Under the Banking Acquisition and Transfer of Undertaking Act, foreign capital cannot exceed 20%.
In fact, when the National Securities Depository Limited (NSDL) and the Central Depository Services Limited (CDSL), both share depositories in India, were asked to monitor the limits under the Foreign Exchange Management Act, PSBs refused to register themselves, saying they were governed by the banking act, which caps it at 20%.
On the other hand, once a bank comes under the Companies Act, there will be no cap, and this will open up foreign investments and could even result in re-rating of these banks by investors. At present, private banks such as ICICI Bank can have up to 100% foreign capital.
Experts believe that considering India is a socialist economy, we would not want 100% FDI in PSBs because it will defeat the whole purpose of the government controlling the bank. "Shifting the control to merely one statutory body might open the banking industry to other challenges. Moreover, a change of jurisdiction to other companies will not solve the problem of dual control unless shareholding of government is diluted," says Atif Farooqi of Duff & Phelps.
According to Anil Girotra, former executive director at Andhra Bank, if those banks still have 51%-plus government holding and are like public-sector companies where the government exercises control over appointments including that of boards, “I don’t think it will have any significant difference from the present position.”
The governance regime in PSBs is complex. “They are subjected to supervision by RBI and overall accountability to constitutional and statutory authorities and the governance regime applicable to the listed companies,” says L Viswanathan, partner and chair – finance and projects, Cyril Amarchand Mangaldas.
Recommendations fall on deaf ears
The multiplicity of regulations has already been identified as one of the causes of ill performance by PSBs by many committees in the past, follow up to which always remained a question. A look at the recommendations will sum it up.
Narasimham Committee, 1991
The committee, in one of its recommendations, emphasised that RBI should become the only regulator of PSBs.
The committee added that given that the government nominees to the board are members of Parliament, bureaucrats, and politicians, they often interfere in the affairs of banks. Hence, it suggested reduction of government equity.
Successive governments led by different political parties have not implemented this particular recommendation, says Reddy.
PJ Nayak Committee, 2014
The committee identified that PSBs face inconvenience due to multiple regulations by RBI as well as the government. It, therefore, recommended reduction in the government’s shareholding in order to reduce its interference in functioning of banks and making RBI as the sole regulator.
It also recommended that the government repeal some of the laws such as the Banking Nationalisation Act( 1970, 1980), the SBI Act, and the SBI Subsidiaries Act, as these acts require the government to keep more than 50% shareholding, and appoint the chairman and managing director and the board of directors.
Once those acts are repealed, government should set up a bank investment company (BIC) under the Companies Act, 2013, as a core investment company and transfer its shares in PSBs to BIC.
Then all PSBs should be registered as subsidiary companies of BIC under the Companies Act so that the latter can have autonomy and the power to appoint board of directors and take other policy decisions.
Nayak declined to comment for this story, saying his recommendations are several years old and he has been pursuing interests outside banking.
Reddy told ET Prime that he did not wish to add to the points he has made in his recent speech.
Counterview: Dual control works fine
“In a way, the credit flow from banks to the private sector is also indirectly controlled by the government. These are politically economic benefits of dual control. Much of the problem of NPAs and frauds observed in the banking sector is a result of interface between politics and business,” Reddy said in his speech.
Further addressing the problem of dual control, Reddy added, “The dual-regulation problem seems to have dual views.” He suggested that the government can reduce its role as an owner and strengthen its role as a regulator. Secondly, the government can fund broad activities, leaving the ownership and operations to the private sector.
However, some people who have been in the system, say the change would not mean much and recommend status quo.
“Changing them into companies is not a solution. Once these banks are brought under the Companies Act, the concept of limited liability would prevail, which would make deposits of the general public unsecured. People will lose their confidence in the banking structure, which is not good for a country like us,” says trade union leader Devidas Tuljapulkar.
On dual control, he says, “The government and RBI have their own defined roles in the public-banking structure and they both are equally important. However, the problem surfaces when the government, instead of giving directions, interferes in the affairs of banks, and RBI as a regulator comes into the picture only when something wrong happens.”
Ravi, whose consecutive stints in state-owned banks raised eyebrows, says, “Suppose, if you give complete control to RBI, including appointment of directors, the case would be that they will be the one appointing the directors and they will also be the one supervising. Does it not become a conflict? The same goes for the government. So, this whole mechanism is well thought of.”
Also, PSBs take the burden of financing government policies, loan waivers, and bailout packages on their shoulders. They have to contribute to policy objectives and other commitments of its owner in addition to commercial goals. “The government is providing capital and anybody who is providing capital would anyway put a condition. I think it’s fine,” says Ravi.
Looking at the fate of several recommendations in the past, even if the government decides to reduce its control, the path seems long and winding. The proposal has to be first presented in Parliament, which could send it to a committee for evaluation. The committee would then recommend it to Parliament for its final approval.
“It seems impractical [to replace the existing governance mechanism in PSBs], given our constitutional and statutory framework. Further, the assumption that extending the governance regime of the Companies Act will per se improve governance is itself questionable, given the examples of governance falling short of expectations in companies under the Companies Act,” says Viswanathan of Cyril Amarchand Mangaldas.
The way forward: a middle path
Experts say that even without a fresh incorporation under the Companies Act, its provisions can be made applicable to banks, as these fall under the term “body corporate”. According to sub-section 4(f) of the Companies Act, provisions of the act can be made applicable to body corporates that are incorporated by any act for the time being, as the central government may, by notification, specify in this behalf, subject to such exceptions, modifications, or adaptation, as may be specified in the notification.
Even though the option of a middle path exists, ultimately it boils down to the will and wishes of the government, the owner of these banks.
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