Webinar :Register now for webinar on 'Trade BankNifty in just 15 minutes a day' - By Asmita Patel
you are here: HomeNewsBusiness
Last Updated : Nov 16, 2020 08:14 AM IST | Source: Moneycontrol.com

Banking Central | How powerful is RBI when it comes to Bank CEO appointments?

The Gurbaxani case, regardless of its outcome, will set a precedent in the banking sector.

On October 26, in an interaction with Moneycontrol, Dhanlaxmi Bank’s ousted Chief Executive Officer (CEO), Sunil Gurbaxani said he is touch with the Reserve Bank of India (RBI) on certain issues related to his exit from the bank last month.

The matter Gurbaxani referred to was his dramatic ouster by big shareholders of the bank at its September 30, 2020 Annual General Meeting (AGM). With over 90 per cent of the votes polled against his appointment, Gurbaxani had to resign just after six months his appointment as CEO was approved by the RBI.

To quote him, this is what he said: “I have been told by the RBI that I should be patient. The RBI has indicated to me that they are weighing all options in this matter.”

Close

Gurbaxani’s dramatic ouster was a one-off case in the banking industry. Shareholders voting out the CEO, appointed with the RBI’s blessings, with no fitting reasons that are known in the public, was unheard of. This brings us to a larger question—just how powerful is the RBI when it comes to the appointment of the CEOs in private banks?

Does the RBI have a final say in it or is it that the regulator is only approving the decision taken by the bank’s Board?

While the legal experts are still divided on the nuances of this issue, the fundamental question ultimately is whether the Banking Regulation Act or Companies Act has an upper-hand when it comes to RBI’s powers on CEO appointments.

According to the Banking Regulation Act, the CEO appointed by the RBI shall remain in office for a period of three years. Section 10 BB of the Banking Regulation Act refers to the power of the RBI to appoint a managing director of a bank if the regulator feels that non-closure of the vacancy is likely to adversely affect the interests of the banking company.

“The 67 [chairman of the Board of directors appointed on a whole-time basis or a managing director] so appointed by the Reserve Bank shall be in the whole-time employment of the banking company and shall hold office for such period not exceeding three years, as the Reserve Bank may specify, but shall, subject to other provisions of this Act, be eligible for re-appointment,” the Section says.

On the other hand, the Companies Act broadly gives the ultimate power on the shareholders to decide almost every aspect of a company. As JN Gupta, former executive director of the Securities and Exchange Board of India (SEBI), said shareholders have the final say in the CEO’s appointment and the RBI doesn’t appoint but only approves an administrative process. The final decision lies with the shareholders unless there is an exceptional situation, according to him.

banking centralDespite this, Gurbaxani appears confident that the RBI will intervene and he will be reinstated as the CEO.

There are a few more questions that need clarity. What happens to the official who is ousted by the shareholder on matters such as compensation if the ouster is not based on any proven charges such as, wrong personal conduct, fraud/ irregularity or actions that are harmful to the interest of the organization. An ousted CEO won’t be in the good books of recruiters and can claim significant damage to his career due to the shareholders’ act.

At the same time, the shareholders’ version too needs to be heard. What were the exact reasons that prompted them to go for this extreme action at the AGM? Did the bank conduct an internal probe on the whole issue? There is no clarity in public domain on any of this.

If a private bank CEO can be thrown out by the shareholders with no proven charges against him or her, smaller banks, dominated by a clutch of shareholders may find it tougher in the future to get quality candidates for the top job.

Dhanlaxmi Bank has already initiated the process of finding a new CEO and interviews began mid-last week. At the same time, Gurbaxani maintains that the RBI is weighing all options on the issue. Only time will tell what happens finally. The Gurbaxani case, whether he will be reinstated in the bank or not, will set a precedent in the banking sector on such cases.

(Banking Central is a weekly column that keeps a close watch and connects the dots about the sector's most important events for readers.)
First Published on Nov 16, 2020 08:02 am
Sections