The timing is impeccable. A day after the exit polls set the market on fire, a Reserve Bank of India (RBI) panel report has recommended that the government should divest its stake in state-owned banks to less than 50%, allow private equity houses to own 40% in distressed banks, and strip managers of private sector banks of their bonuses and Esops if they are caught ever-greening sticky loans.
It has also said that RBI — and not the finance ministry — should have the last word on regulation of public sector banks which command 70% of the market share. “Boards (of PSU banks) are disempowered, and the selection process for directors is increasingly compromised,” said the report. The recommendations have the potential to transform Indian banks.
The RBI-constituted committee is headed by PJ Nayak, the bureaucrat-turnedbanker who led Axis Bank for a decade.
The panel has proposed an age limit of 65 years for CEOs and wholetime directors of private sector banks. Once implemented, lenders like IndusInd Bank and HDFC Bank would have to identify successors for Romesh Sobti and Aditya Puri in the next two years.
“Executive responsibility and corporate governance have not grown in tandem which is required for creating a healthy banking system and the report has tried to address it,” said Shinjini Kumar, director, PricewaterhouseCoopers. The Nayak committee has suggested certain checks and balances for banks where the promoter is also the CEO.
“Where the principal shareholder in an entrepreneur-led bank is also the bank’s CEO, RBI should satisfy itself that the board is adequately diversified and independent with professionals of high standing. Where RBI lacks confidence of such independence, the controlling shareholder should be asked to step down as CEO,’’ said the committee.
Private lenders like YES and Kotak are led by promoter CEOs. However, the committee is in favour of promoters retaining up to 25% equity stake in banks as against RBI’s earlier policy under which they were directed to lower it to 15% in phases.
In this connection, it has asked RBI to issue guidelines to allow shareholders to enjoy voting rights up to 26% and eventually aligning it with actual shareholding. The voting right continues to be capped at 10% (irrespective of shareholding) currently, despite a change in law.
The most dramatic suggestion by the panel relates to ever-greening — an accounting trick to hide bad loans on banks’ books. It has proposed “cancellation of part or full, of unvested stock options of officers and whole-time directors, and the claw-back of monetary benefits like bonuses by the bank, in part or full.” Under such circumstances, the chairman of the audit committee would also have to step down from a bank’s board.
In order to salvage sick banks in dire need of fresh capital, the committee believes India, like some of the other Asian countries, should permit private equity funds and sovereign wealth funds to acquire up to 40% equity in such banks.
In order to weed out ‘unfit’ shareholders in a bank, the RBI, according to the panel, should have the right to freeze the investor’s voting rights and seek disinvestment of the shares within a time frame.
The regulator should spell out a list of’ ‘fit and proper’ investors like pension funds, provident funds, long-only mutual funds, long-short hedge funds, exchangetraded funds and private equity funds that would be permitted to hold 20% in a bank with no rights to appoint directors on the bank board. However, insurance companies and non-banking finance companies should not be included this list. With board representation, they would hold up to 15% stake in the bank.
In case of PSU banks, the government, as per the report, should transfer its shareholding to a proposed Banks Investment Company (BIC) that would be empowered with the governance at the banks’ board.
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