The arrest of M S Johar, a chartered accountant who was a director on the board of Central Bank of India, has once again put the spotlight on the role of independent directors who are on the boards of public sector banks and other state run entities.
The entire appointment process for such directors is mired in controversy. “Political and bureaucratic interference, in most cases, determines the appointment of independent directors,” said a bank official.
Johar is among the eight people arrested by the Centre Bureau of Investigation on Wednesday on charges of facilitating loans to companies in return for cash.
“He attended a few meetings of the board, so his interaction with other directors was limited…may be once a month, since he was a part-time director,” said a banker who knew Johar. The auditor has been a director on the Central Bank’s board for close to three years.
“All public sector banks have chartered accountants, several of whom bat for corporate houses who have been their clients,” said a bank chief. While their interaction with colleagues on the board might be limited, these people have access to senior and middle-level bank executives , some of whom are often willing to oblige.
Public sector banks have had chartered accountants directors, who are nominated by the government, for several years. In most cases, they are from little-known firms. “The bigger names do not have the time to be directors on the boards of small banks,” said a former finance ministry official who had to deal with with such appointments.
In any case, officials and bankers say there is immense political pressure. Most government-appointed directors, barring the official nominee, are small-time politicians ranging from retired parliamentarians to party functionaries. “It is no longer an independent process and there is no transparency in the way the whole thing is done,” said a banker.
In fact, some chartered accountants have been on boards of various banks for over a decade. “There is an incentive to be a director on board of banks and that is why several chartered accountants lobby with government functionaries,” said the former CMD of a Delhi-headquartered bank.
The Satyam scandal had also highlighted the failure on the part of independent directors. There are several instances where independent directors have failed to play their role and allowed companies to resort to unfair practices. The new Companies Bill, which is pending in Parliament, is expected to usher in reforms and clean up the appointment process of independent directors. It is also expected to fix responsibility on these directors so that they perform the role they are expected to play.
It is, however, a different matter that the Banking Regulation Act also needs to be amended to reduce the finance ministry’s influence on bank boards.