RBI's draft framework advocates for independent members in SRO boards

The struggle to get top-flight IDs on their boards found indirect mention in the first-of-its-kind interaction between the RBI's brass and the boards of state-run banks and private banks

Mint Road’s draft omnibus framework for self-regulatory organisations (SROs) has it that at least a third of an entity’s board of directors, including the chairperson, must be independent. Also, they should have no association with the category or class of regulated entities (REs) for which it has been set up. In one fell swoop, not only is the demand for independent directors (IDs) in the financial services space set to go up manifold, but it raises a concern: Just how many will put up their hands to come on the board of an SRO?

Let’s take banks and IDs.

The struggle to get top-flight  IDs on their boards found indirect mention in the first-of-its-kind interaction between the Reserve Bank of India’s (RBI’s) brass and the boards of state-run banks and private banks in New Delhi and Mumbai on May 22 and May 29 last year. A big off-record talking point in recent times has been that bank boards are now burdened with matters that should be in the domain of the professional management.

In the case of private banks, it's said annual inspections routinely raise questions as to why a matter was not referred to the board. Often, board meetings are almost full-day affairs, and IDs are said to have expressed the view that they have day jobs, too, and it’s not worth their time to get involved in “executive” matters. Industry sources are of the view that not many will be willing to be on the board of an SRO: Remuneration will be a sticking point and the job expected of IDs will be onerous (given the premium Mint Road now places on governance).

A counter view is that the RBI should have insisted that the strength of IDs on SRO boards be at two-thirds. Why? “This would have cut the room for heavyweights among the member entities calling the shots,” says an expert. This comes across as a more stringent version of the Banking Regulation Act, 1949, which states that directors are not to have substantial interest in, or be connected with, whether as an employee, manager, or managing agent with any company, or any firm, which carries on any trade, commerce, or industry and which, in either case, is not a small-scale industrial concern. What is unsaid in all this is the fear that SROs may become captive to vested interests, and blur the lines with that of lobby groups.

Perhaps, there’s a case for a hybrid version like in the case of urban co-operative banks (UCBs) with deposits of over ~100 crore, which were asked to set up a board of management (BoM) under the RBI’s notification of December 31, 2019. While Mint Road did not specifically mention whether sub-section 2 of section 10A of the BR Act will apply entirely, it referred to the provisions: “The BoM will have specialists drawn from accountancy, agriculture and rural economy, banking, co-operation, economics, finance, law, small-scale industry, and information technology.” At that point, this was seen as needless duplication — that the BoM can distract UCB’s management from their business. But it has worked.

Then, can a person drawn from a private equity (PE) firm or with an association with it, be on the board of an SRO as an ID? Technically, it’s a no-go even if a PE has exposure to even one of an SRO’s members as it becomes a related party. In the case of fintech, which is a sunrise sector, SROs will find it even tougher to get IDs who have “adequately skilled human resources and robust technical capability to monitor the sector,” as mentioned in the draft omnibus framework.

The plot can get more complicated when it comes to non-banking financial companies (NBFCs). A top official points to the multiplicity of categories with no coherence in either their activities or regulations. “At times within the same corporate group, you have NBFCs focussed at different products and customer segments — plus a core investment company.”

And just how many SROs are to be licenced?

The Fintech Association for Consumer Empowerment has approached the RBI to get an SRO licence and so has the Digital Lenders Association of India. There have been whispers that the Indian Banks' Association and the Payments Council of India are to jointly set up an SRO for digital payments. And this is a sector where just about every other financial vertical has been re-imagined. It looks like more than one SRO for every sector may well be the norm.

Microfinance institutions have two SROs — Microfinance Institutions Network, and Sa-Dhan. That leads us to the question: What about coordination between SROs? Will there be a mirror-image of the Financial Stability and Development Council set up in December 2010 — the coordinating agency for regulators — chaired by the finance minister?
 

And lastly, whether an RE wants to be a member of an SRO is to be voluntary. What if a few big players in a segment opt to sit out? How representative will that SRO be of the segment it claims to speak for?