MC EXCLUSIVE Top bankers meet PMO officials, seek more discretion in CEO and board appointments

RBI

Top-level representatives of the banking sector are said to have requested more autonomy for managements, board of directors and promoters of private sector banks during a recent interaction with certain senior government officials. Autonomy was sought for critical aspects such as appointment of chief executive officer and their tenure, Moneycontrol has learnt.

Highly placed sources aware of the interaction said senior representatives of private sector banks who were part of the meeting, suggested that the current norms put in place by the Reserve Bank of India (RBI) on leadership appointments could perhaps be "arbitrary to some extent", thus warranting some changes and a rethink.

Some senior officials in the government are open to re-examining the RBI’s regulatory authority on this matter and feel a "new mechanism" should be set up, which would oversee the appointment of leadership in private banks, a senior government official directly aware of the matter told Moneycontrol. 

The meeting, which is said to have been held in mid-August, was part of an ongoing initiative driven by the Prime Minister’s Office (PMO).  A few important bankers and senior leaders of the banking fraternity were roped in to provide inputs on enhancing ease of doing business in India.

For now, it is gathered that the central government is working on relaxing several regulations across sectors in the coming months and is aimed at enhancing the ease of doing business in the country. The sources cited however said that the specific idea of simplifying norms around CEO appointment is at a preliminary stage and views of all stakeholders, notably the RBI,  has not yet been considered.

A mail sent to the PMO, Finance Ministry, and RBI, remained unanswered at the time of publishing.

Current Norms

As per the current RBI norms, any appointment, re-appointment, or termination of a chairperson, managing director (MD), chief executive officer (CEO), or any other whole-time director (WTD) requires the prior approval of the banking regulator. The bank must submit a proposal to the RBI, typically with a list of at least two potential CEO candidates in order of preference, at least four months before the expiry of the current incumbent's term.

In most cases it takes around three months from when the proposal was submitted, for the RBI to approve the appointment. The RBI also has a reasonable say in bonuses, ESOPs and incentives extended to a CEO and the regulator may make suggestions to the board to claw back the payouts in certain exceptional cases. These powers are not explicitly part of the current regulations but are informally exercised by the central bank.

The RBI has also mandated that private banks must have at least two whole-time directors ( WTD), including the MD & CEO, on their boards; and has capped the maximum age for a WTD, MD, or CEO at 70 years.

Regulations also cap the maximum tenure for an MD and CEO at 15 years. Post this, the candidate can be re-appointed, provided they have not hit the 70-year mark,  only after a cooling-off period of three years, during which they cannot be associated with the bank or its group companies in any capacity.

A person with knowledge of this discussion confirmed to Moneycontrol that there may not be too many takers among senior officials for the suggestion to review the RBI’s norms. "Many, including officials who may be involved in the finance ministry are not keen on changing norms laid down by the RBI on this issue," the official said. Some officials though may be willing to examine the idea.

One senior official said that there is no clarity so far on which specific norms should change. But added that the Centre might have to make some legislative changes to keep a check on RBI’s regulatory authority.

‘Restrictions on CEO tenure, manner of appointment unique to India’

The ask with respect to a CEO tenure and manner of appointment seems to be based on the logic that such restrictive norms may be specific to India and not aligned with how the rest of the banking industry globally functions. "Nowhere abroad does a central bank intervene in the deciding the leadership positions in a private bank. This is solely the responsibility of the bank’s board. That should be the case in India too," said a senior banker who attended the meeting with the PMO last month.

After several rounds of deliberation, the RBI in 2021 formally introduced norms to cap the tenure and age limit of a CEO. This was done as a specific measure to periodically infuse new leadership in the banking industry and ensure smooth succession planning.

"Given that this regulation is still nascent and we have seen only one round of a notable change in leadership structures across banks, it might be too early for the regulator to relook at these norms and it would also be too early for the government to give its suggestions in this regard," said a banker who didn't want to be named.  "A nudge in this direction may also be viewed as interfering with the through process followed by the regulator," said another person who didn't want to be quoted.

Reiterating that discussions are still at a very preliminary stage, the source cited earlier refrained from giving any guidance on when a decision may be taken in this regard. "There is a possibility that this proposal is turned down or implemented in a slightly different manner which may leave better flexibility in the hands of promoters and the management," he added.