RBI has constituted an Internal Working Group to review guidelines on ownership, governance and corporate structure of private sector banks taking into account the giant strides made by them in the recent past since 2002 onward. The new guidelines to be formed internally within RBI would also be put up in their web site for the views of all interested to comment. Recent actions of major share holders in banks like Kotak Mahindra Bank and others have also woken up RBI to act immediately. Can private sector banks include in their major share holders leading industrial groups as was the situation before nationalization. If so, what are arm’s length transactions to be initiated to protect the interests of all stake holders.

Let us look at the terms of reference for the internal RBI group and later, we shall discuss the current extant RBI instructions on private sector banks in India. Obviously, I have quoted from their web site whose address is given below:

 https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=49945

“The Terms of Reference of the Committee are given below:

i. To review the extant licensing guidelines and regulations relating to ownership and control in Indian private sector banks and suggest appropriate norms, keeping in mind the issue of excessive concentration of ownership and control, and having regard to international practices as well as domestic requirements;

ii. To examine and review the eligibility criteria for individuals/ entities to apply for banking license and make recommendations on all related issues;

iii. To study the current regulations on holding of financial subsidiaries through non-operative financial holding company (NOFHC) and suggest the manner of migrating all banks to a uniform regulation in the matter, including providing a transition path;

iv. To examine and review the norms for promoter shareholding at the initial/licensing stage and subsequently, along with the timelines for dilution of the shareholding; and,

v. To identify any other issue germane to the subject matter and make recommendations thereon.

The Committee shall submit its report by 30th September 2020”.

Now is the time to look at the original instructions of RBI on private sector banks from their web site address given below and also discuss the same. Finally, I may give conclusions for your consideration:

“A comprehensive policy framework for Ownership and governance in private sector banks

https://rbidocs.rbi.org.in/rdocs/notification/PDFs/54688.pdf

Let us recollect the extant instructions issued by RBI to ensure due representation as per laid down norms of Banking Regulations Act, 1949 and additional modifications as and when issued are given in share holding and in composition of the board. These covered areas like appointment of the members of Board, foreign investment and replacement of all members of Board including the Chairman. Let us recollect earlier instructions as:

  • Composition of Board of Directors composed of members with professional and other practical experience in fields like agriculture, rural economy, cooperation, small-scale industry, Law or social service, permission of RBI for appointment of Chairman along with period of stay, removal of members of Board with the approval of RBI, etc. had been prescribed in terms of Banking Regulations, Act, 1949.
  • Guidelines on corporate governance, signing of deed by covenants by directors, issued by RBI on June 20,2002
  • Guidelines for acknowledgement of transfer / allotment of shares in private sector banks was issued in the interest of transparency by RBI on February 3, 2004
  • Foreign investment in the banking sector is governed vide Press Note dated March 5, 2004 issued by the Government of India, Ministry of Commerce and Industries
  • Replacing appointing of all directors in all private sector banks by select banks by RBI

The ownership and governance of private sector banks were ensured by laying down the following precepts:

  • The ownership of and control of private sector banks is well diversified to ensure avoidance of misuse of powers
  • Important share holders having share holding of 5% and above are ‘fit and proper’ as described in the guidelines dated February 3, 2004.
  • The Chairman and Board of Directors invariably fall under ‘fit and proper’ category to ensure sound corporate governance principles
  • RBI not to appoint any director to avoid conflict of interest
  • The capital structure is as per RBI guidelines to have optimal operations
  • Finally, the policies are fair and transparent.

Share capital

The purpose of this article emanated with the wrangling of some private sector banks major shareholders delaying reduction in their shareholding in terms of laid down norms of RBI. Luckily, RBI constituting a committee would look at fresh views for broad basing their structure which may be equally breath taking. Let reproduce the actual stipulations of RBI regarding the shareholding as under:

“The broad principles underlying the framework of policy relating to ownership and governance of private sector banks would have to ensure that:

(i) The ultimate ownership and control of private sector banks is well diversified.

(ii) Important Shareholders (i.e., shareholding of 5 per cent and above) are ‘fit and proper’, as laid down in the guidelines dated February 3, 2004 on acknowledgement for allotment and transfer of shares.

(iii) The directors and the CEO who manage the affairs of the bank are “fit and proper” and observe sound corporate governance principles.

(iv) To avoid conflict of interest, RBI will not appoint its nominee on the Boards of private sector banks unless there are exceptional circumstances.

(v) Private sector banks have minimum capital / net worth for optimal operations and systemic stability.”

The words “fit and proper” was used by one of the founders of a private sector bank chairman to avoid giving the directorship to the daughter of the other founder member who died in a plane crash. Though every one including the Board agreed with his arguments, later swindling of funds by many in that private sector bank and further sacking of the Chairman, now under CBI investigation are now part of history.

Minimum capital

As per RBI guidelines dated January 3, 2002 the entry capital for a new private sector bank has to be Rs 200 Crores which has to be upgraded to Rs 300 Crores over a period of three years. This is to ensure that all private sector banks at all times have a minimum net worth of Rs 300 Crores.

Shareholding

RBI guidelines dated February 3, 2004 has stated that no single entity or group of related entities has shareholding or control, directly or indirectly, in any bank in excess of 10 per cent of the paid-up capital of the private sector bank.

Any higher level of acquisition will be with the prior approval of RBI. It was emphasized that single entity should be a well established and regulated financial entity with good standing. Expectedly, established industrial houses were forbidden to set up banks.

Directors and corporate governance

Yes, as a cardinal principle, not more than one member of a family or a close relative (as defined under Section 6 of the Companies Act, 1956) or an associate (partner, employee, director, etc.) has been prescribed as a Board member.

Foreign investment in private sector banks

In terms of the GOI press note of March 5, 2004, the aggregate foreign investment in private banks from all sources (FDI, FII, NRI) cannot exceed 74 per cent. The limit of 74 per cent will be reckoned by taking the direct and indirect holding. This obviously leaves 26% holding by residents at all times.

Foreign Institutional Investors (FIIs)

 Currently there is a limit of 10 per cent for individual FII investment with the aggregate limit for all FIIs restricted to 24 per cent which can be raised to 49 per cent with the approval of Board / General Body. This dispensation which continues till date may also be reviewed by the new in-house committee of RBI.

As per nonresident Indian holding,” Currently there is a limit of 5 per cent for individual NRI portfolio investment with the aggregate limit for all NRIs restricted to 10 per cent but can be raised to 24 per cent with the approval of Board / General Body.” This may also be revisited by the expert committee.

Continuous monitoring

While the prescription” Where RBI acknowledgment has already been obtained for transfer of shares of 5 per cent and above, it will be the bank’s responsibility to ensure continuing compliance of the fit and proper criteria”, has been in vogue for a long time, how is that the Board duly appointed as per RBI regulations in many private sector banks like ICICI, Yes Bank, Axis Bank and many cooperative banks simply cowed in to the pressure of the Chairman, of whom many face investigations by CBI and other authorities? Powerful Chairman who concocted the results by influencing the stake holders have brought financial down fall for many private sector banks.

Like anyone else expectation either as a share-holder, depositor or borrower, it is the duty of RBI to have an effective monitoring 24×7 at all days in all banks to avert financial disasters. Recent failure of banks brought untold miseries for deposit holders, most of whom among middle and poor middle class. Even among the upper middle class, all the honest men faced uncertain future. It is requested that RBI along with Ministry of Finance exercise enormous monitoring to safeguard the interests of all stake holders.

Guidelines for acknowledgement of transfer / allotment of shares in private sector banks

RBI has given directions which run into 4 pages of which “As hitherto, acknowledgement from RBI for acquisition/transfer of shares will be required for all cases of acquisition of shares which will take the aggregate holding of an individual or group to equivalent of 5 percent or more of the paid-up capital of the bank.

RBI while granting acknowledgement may require such acknowledgement to be obtained for subsequent acquisition at any higher threshold as may be specified. The term “holding” in paragraph above refers to both direct and indirect holding, beneficial or otherwise.” attracts our attention. The clear meaning of above instructions responds with accumulation of voting power in the hands of unwanted elements which may wreck the bank itself.

The recent happening in the annals of private sector banks particularly unwanted advances to groups by Chairman of the banks at avoidance of arm’s length transactions down graded the financial health of the then best run private sector banks.

How can we stop the greed of individuals to wreck the financial health of very good private sector banks who have emerged as business rivals to public sector banks who have slipped many grades of rating and struggling to survive?

Conclusion

Every time RBI ventures ahead with detailed instructions after obtaining the views of all stake holders from public platform, it looks as if the Indian banking scene will spread its hold and strengthen its position among the banking giants in the world. This time the expectations of RBI internal committee is to break the current mold, enable the best boards to take the wings aided by the best Chairman and other KMP available to face the uncertain international banking scene. Failure is guaranteed like it is for any international giant but how far and how quick Indian banks would take command of the available opportunities and convert themselves into banks among the top 100 in the world is in every one’s mind.

Banking is inherently a risky business but some of the biggest commercial ventures are from international banking scene. It is time to enable at least top 10 Indian banks among the best in the world. This is highly expected from Indian private sector banks whose shackles are expected to be the minimum for optimum performance.

Let RBI internal committee do its best.

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