Dhanlaxmi Bank CEO case to test primacy of RBI over banks' shareholders

The removal of CEO Sunil Gurbaxani has led the private banking system into uncharted waters

The removal of Sunil Gurbaxani from the corner room at Dhanlaxmi Bank in a shareholder coup has led the private banking system into uncharted waters. Should the Reserve Bank of India (RBI) go along with what a bank’s shareholders deem fit by exercising their rightunder the Companies Act? Or should it reinstate a helmsman (in the immediate instance Gurbuxani) to underscore its powers, and the primacy of the Banking Regulation Act (BR Act: 1949), if it were to feel otherwise?

The BR Act vests the banking regulator with the powers to appoint “the chairman of the Board of Directors (BoD) on a whole-time basis, or a managing director (MD) of a banking company”. By extension, this Act allows for their removal, too. Privileging the BR Act over other regulations has never been a point of debate so far, but the fate of Gurbuxani at Dhanlaxmi Bank has changed the plot, and either side of the debate can be argued.

One view is that overriding shareholders by the central bank will make for bad precedent. Implicit in this thinking is that there could be many more situations down the line of diametrically opposing views being held on a bank’s incumbent MD and chief executive officer (CEO). For instance, what if big institutional shareholders were to link their participation in a bank’s capital-raising plan to their choice of who is to sit in the corner room? This aspect has already reared its head after the RBI released its governance code, which private bank honchos felt amounted to an attempt at curtailing their freedoms. 

“It could also be that the disposition of shareholders and the central bank towards a particular candidature is largely subjective after all,” noted a senior banker.

Cut to Gurbuxani: What would be the implications if he were not to be reinstated, and the RBI went along with the stance of the bank’s shareholders?

He took charge as MD & CEO on February 27 this year for a three-year term — with the approval of both the bank’s BoD and the banking regulator (and this point needs to be stressed). In the run-up to his removal, D K Kashyap (an RBI general manager) had been put on the board of the bank, an indicator that governance was not up to the mark. The RBI had also asked for the termination of the services of P Manikandan, a chief general manager (CGM) at the private bank, which was carried out. When was the last time you heard of the banking regulator asking for the removal of the CGM of a bank, big or small? It’s a reflection of the amount of regulatory energy invested in Dhanlaxmi Bank.

Now, if a new MD & CEO were to be appointed, is it to be inferred that both shareholders and the central bank erred big time while making a “fit-and-proper” assessment when Gurbaxani’s name was mooted for the corner room? What is one to make of this about-turn in opinion within six months, which will make his tenure the shortest at a bank’s helm in the history of the country’s banking? Can it be that 90.49 per cent of the bank’s shareholders who voted against Gurbaxani’s appointment found him unfit for the job all of a sudden? And lastly, what if the new MD & CEO is also removed due to the bank’s key shareholder’s discomfiture?

Of course, there’s also a positive fallout beyond the immediate. For long, bank shareholders — whether institutional or retail —have been passive. A few bank bosses ran fiefdoms, and caused instability to their banks and the system when they were caught out eventually. With capital quoting at a premium, shareholder activism can only be expected to go up. This will also come into play as and when state-run banks are privatised and it is likely to be a big talking point as we come closer to it. This will hold true for the older and smaller private banks as well, given that many of them need capital urgently. On the last-mentioned point, it is entirely possible that fresh investors may not supply capital if it is felt that well-entrenched interests are busy manipulating the system.

The larger context in which the BR Act versus Companies Act debate (if it were to be posited as such) has to be seen is that a bank is unique by virtue of it being the custodian of public trust (read deposits). And unlike any other corporate entity, is part of the settlement system. Pain-points can spread quickly and lead to systemic disruptions on a wider scale: Yes Bank, or a Punjab and Maharashtra Co-operative Bank being examples, and even from a non-banking financial company (non-deposit taking at that) such as Infrastructure Leasing & Financial Service.

And at the regulatory level, it would not be farfetched if the central bank were to now take a relook at what’s currently defined as “systemically important” entities or, in lay terms, those seen as “too-big-to-fail”. It’s clear that given the systemic risks caused due to the disruptions by entities with weak financials and governance structures, the central bank’s powers under the BR Act should prevail.

So, should the RBI reinstate Gurbaxani? Either way, the move will be precedent-setting.