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Closer scrutiny of independent directors likely amid IndusInd Bank row
The role of independent directors (IDs) on the boards of private banks may come under closer scrutiny following the blowout at IndusInd Bank.
While the Reserve Bank of India (RBI) does take bank board deliberations into its annual inspections, the stress on governance premium and the events at IndusInd Bank may intensify the gaze on IDs, said multiple banking sources on the condition of anonymity given the sensitivities involved.
'One of the most important skills needed for being an effective board member is the ability to see beyond the presentations and connect the dots without getting lost in siloed topics. This skill is hard to come by and can only manifest when quality time is devoted to the role. Such people are in demand across the system,' said R Gurumurthy, who serves as ID on the boards of Arka Fincap and Religare (he was the head of governance at RBL Bank).
A source said that the vetting process of IDs may become more intense.
The role of IDs and boards was articulated by the then RBI Governor Shaktikanta Das in meetings held with the boards of state-run and private banks two years ago. The meetings stressed on governance, the role of the boards and supervisory expectations. They were a follow-up to Union Finance Minister Nirmala Sitharaman's announcement in Budget FY24 on the need to improve the standards of governance and investor protection in banking. Sitharaman had said the government would amend the RBI Act, 1934, the Banking Regulation Act, 1949, and the Banking Companies (Acquisition and Transfer of Undertakings Act), 1970.
Das had held, 'it is necessary that independent directors are truly independent; that is, independent not only of the management, but also of controlling shareholders while discharging their duties. They are to always remember that their loyalty is to the bank and no one else; and are expected to ask pertinent questions and obtain the required information from the management before making decisions.' But he had also qualified: 'I am not advocating any confrontation but only stressing the need for the required level of alertness among all directors.'
The events at IndusInd Bank also bring the observations made in the P J Nayak Committee to review governance of boards of banks in India (May 2014) into relief.
It had noted that 'as the non-executive chairman is not an ID, a lead ID could play a helpful role in each bank board, and would be chosen by the board's IDs. Such a spokesperson for the independent directors could be a useful counterpoint in the board to the chairman and the chief executive officer.'
The report also touched upon the 'fit-and-proper' criterion for IDs. At a minimalist level, fit-and-proper is 'an exclusion criterion'. Potential directors convicted of fraud or incoming investors who have been subject to major criminal penalties can be argued not to be fit and proper. This minimalist interpretation signifies who should be excluded rather than included.
It also stressed that bank boards need to aim higher as an inclusion category, seeking talented professionals on boards and reputed investment funds as shareholders, for the governance and reputation gains that these would bring the bank. Reputed investment funds ask demanding questions of bank managements, and are known to exit when answers are unsatisfactory. Talented directors similarly improve board governance. 'Fit-and-proper cannot be the criterion for such inclusion, and needs to move to a more demanding threshold.'
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