A Reserve Bank of India (RBI)-appointed panel, headed by former Axis Bank chairman PJ Nayak, has recommended radical reforms for Indian banks. It suggested the government transfer all its stake and powers in public sector banks (PSBs) to a separate entity, to be known as bank investment company (BIC). "It is a fundamental irony that currently, the government disadvantages the very banks it has invested in," said a report by the committee. The panel suggested the government either privatise or merge the banks it owned, or design a radically new governance structure to allow PSBs to compete successfully and avoid excessive dependence on government recapitalisation. It also recommended all existing laws governing the lenders - the Nationalisation Act, the State Bank of India Act, etc - be repealed and banks be governed by the Companies Act. The committee proposed the BIC be constituted as a core investment company under RBI regulations and the character of its business "make it resemble a passive sovereign wealth fund for government banks". It added the entity should be headed by a professional banker or a private equity investment professional, to be appointed after a search process. Investment returns should be the yardstick to evaluate the BIC chief's performance, the panel said. It has also recommended the government cut its stake in PSBs to less than 50 per cent so that there was a level playing field for these banks in matters of vigilance enforcement, employee compensation and applicability of the Right to Information. Stake dilution was also recommended keeping in mind the government's increasing fiscal burden. For private banks, a special category of investors, authorised bank investors (ABIs), was recommended.
This segment, it was proposed, would have diversified investors and be discretionally managed by 'fit and proper' fund managers. ABIs could hold up to 20 per cent stake in a bank, without prior approval, and 15 per cent with voting rights, it was said. Any entity should be allowed to own 10 per cent stake in private banks without RBI approval, compared with the current five per cent, the panel said. Promoters should be allowed to hold 25 per cent, compared with 15 per cent under the new bank licence norms, it added. "The principle of proportionate voting rights should constitute part of the regulatory bedrock that fosters good governance," the report said, adding for distressed banks, private equity funds, including sovereign wealth funds, should be allowed to take a controlling stake of up to 40 per cent. For PSBs, a three-phased approach was proposed for board-level appointments. In the first, a banks' board bureau, comprising former senior bankers and chairmen and executive directors, should be set up, it was mooted; this bureau would look after affairs till the BIC took shape. "The chairman and each member of the bureau should be given tenures of up to three years," the report said. In the second phase, the BBB would be undertaken by the BIC. Also, the BIC would strive to professionalise bank boards; in the third phase, the BIC would shift several of its powers to bank boards, the Nayak panel proposed. "The duration of this three-phase transition is expected to be between two and three years," it said. From the second phase, the longest term for any director other than whole-time directors in banks would be restricted to seven years. The panel also proposed a cooling-off period of five years for a director to return to a bank board, and a two-year cooling-off period for a director to be appointed on the board of a different bank. Also, a director on a PSB board could be a director of only six other listed companies. Emphasising the need to upgrade the quality of board deliberation in PSBs, seven themes were identified to be discussed at board meetings - business strategy, financial reports and their integrity, risk, compliance, customer protection, financial Inclusion and human resources. "Among the seven themes identified for detailed board scrutiny, a predominant emphasis needs to be provided to business strategy and risk," the report said. While the government would initially hold the entire equity in BIC, the panel sought government stake of less than 50 per cent, adding the government should not issue any regulatory instruction that was only applicable to PSBs, as dual regulation was discriminatory. "RBI should be the sole regulator for banks, with regulations continuing to be uniformly applicable to all commercial banks," the report added. Recommending splitting the post of chairman and managing directors, the report sought a term of at least five years for bank chairmen and at least three years for executive directors. FOR BETTER GOVERNANCE Nayak panel recommendations on governance of banks' boards * Remove external constraints on state-run banks * Upgrade quality of board deliberation of state-run banks * Create bank investment company to hold stakes in state-run banks * Constitute bank boards bureau for selection of top management * Uniform licensing regime desirable * Allow profit-based commissions for non-executive directors * Maximum age of whole-time directors should be 65