Term of shareholder directors in banks may be capped
Proposed move aims at improving corporate governance practices in govt institutions
The government is planning to put a cap of six years on the term of shareholder directors and non-official directors on the board of banks, insurance companies and financial institutions. At present, there is no cap on the term of such directors. The proposed move is aimed at improving corporate governance practices in these government institutions.
Shareholder directors are usually nominated by minority shareholders and are different from independent directors nominated by the government. The proposal was mooted by the Department of Financial Services after it noticed appointment of many of these directors on the board of government-run lenders lacked transparency. The matter is being considered by the Reserve Bank of India (RBI).
“Policy regarding appointment of shareholder directors may be review. We have proposed a cap on the term of these directors,” a finance ministry official told Business Standard.
Concerns have been raised about the appointment of such directors on the boards of banks as most of them usually comprise chartered accountants who can use their position on the board to influence its decisions. The finance ministry wants to induct professionals from various fields on the boards.
Officials said many of them get a seat on board because of their proximity with bank chairman or by putting political pressure for their appointment and re-appointment. There are cases when people were appointed as shareholder directors after serving as government nominee directors for several years.
“If all boards are loaded with chartered accountants it can’t be a co-incidence. Board of a bank should have people from diverse fields,” added the official.
A board of a public sector bank usually comprises a Chairman & Managing Director, one or two executive directors, one nominee each from the government (mostly a finance ministry official) and the RBI, two employee union nominees, up to three shareholder directors and non-official directors.
Until few years ago, all six independent directors could be shareholder directors but the rule was changed in 2007 and the number was reduced to a maximum of three.
The finance ministry has been trying to reform the way government banks run their boards. Earlier this year it had suggested banks should devote one meeting every quarter to major policy and strategic issues. It also said banks should prepare a calendar of the board meetings right at the beginning of the year, against the current practice of convening meetings at short notice.
It said banks should prepare an action plan on four key areas—business strategy, core business, human resources and succession planning, risk and non-performing asset management. The progress on all these topics will be reviewed every quarter in comparison with the competitors.