regulation and corporate

7/23/2019 Regulation and Corporate

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Corporate Governance

Factors affecting CorporateGovernance

Mechanisms of CorporateGovernance

Chindhan E B

DGM & MoF-In-Charge

RBI, ZTC, New Delhi


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Corporate Governance

Corporate governance refers to the set of systems,principles and processes by which a company isgoverned

They provide the guidelines as to how the company

can be directed or controlled such that it can fulfil itsgoals and objectives in a manner that adds to thevalue of the company and is also beneficial for allstakeholders in the long term

Stakeholders in this case would include everyoneranging from the board of directors, management,shareholders to customers, employees and society

The management of the company hence assumes therole of a trustee for all the others


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What are the principles underlying

corporate governance?

Corporate governance is based on principles suchas conducting the business with all integrity andfairness

Transparent with regard to all transactions, makingall the necessary disclosures and decisions

Complying with all the laws of the land,accountability and responsibility towards thestakeholders

Commitment to conducting business in an ethicalmanner


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Why is it important?

Separation of ownership and management so that theinterests of all stakeholders are protected

Empirical evidence shows that businesses withsuperior governance practices generate bigger profits,higher returns on equity and larger dividend yields

Importantly, good corporate governance also showsup in such soft areas as employee motivation, workculture, corporate value system and corporate image

Conversely, the failure of high profile companies suchas BCCI, Enron and WorldCom was a clear lesson ofthe damage bad corporate governance can cause

In India, Satyam Computers received GoldenPeacock Global Award for Excellence in CorporateGovernance in September 2008 and was rattled withthe India largest corporate frauds of over Rs.7000 crin December 2008


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How is Corporate Governance of

Banks Different? Banks are different from other corporates as their

presence of a large and dispersed base ofdepositors in the stakeholders group

Banks lubricate the wheels of the real economy,are the conduits of monetary policy transmissionand constitute the economys payment andsettlement system

By the very nature of their business, banks arehighly leveraged

They accept large amounts of uncollateralizedpublic funds as deposits in a fiduciary capacity andfurther leverage those funds through creditcreation


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How is Corporate Governance ofBanks Different.cont

Banks are interconnected and have serious contagionpotential

If a corporate fails, the fallout can be restricted to thestakeholders

If a bank fails, the impact can spread rapidly through toother banks with potentially serious consequences forthe entire financial system and the macro economy

Boards and senior managements of banks be aware ofthe potentially destructive consequences of excessiverisk taking, be alert to warning signals and be wise

enough to contain irrational exuberance

If the directors on the boards of banks didnt know whatwas going on, they should ask themselves if they werefit enough to be directors


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corporate governance of banks in

emerging economies

First, in emerging economies, banks are more than mereagents of financial intermediation

They carry the additional responsibility of leading

financial sector development and of driving thegovernments social agenda

Second, in emerging economies, the institutionalstructures that define the boundaries between theregulators and the regulated and across regulators arestill evolving

Managing the tensions that arise out of these factorsmakes corporate governance of banks in emergingeconomies even more challenging


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Regulation and Corporate

Governance of Banks Regulation has historically had a significant role in the

evolution of corporate governance principles in thebanking industry

Regulation can complement corporate governance, but

cannot substitute for it

Regulation can establish principles and lay down rulesbut the motivation to implement these principles andrules in their true spirit is a matter of organizationalculture

If banks see adherence to regulation as a mere

compliance function, and not as a culture buildingobjective, the ability of regulation to further corporategovernance can be quite restrictive


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Banking regulation shifted from

being prescriptive to beingprudential ?

Being prescriptive to being prudential

This implied a shift in balance away from

regulation and towards corporate governance Banks now had greater freedom and flexibility to

draw up their own business plans andimplementation strategies consistent with theircomparative advantage

The boards of banks had to assume the primaryresponsibility for overseeing this

This required directors to be more knowledgeableand aware and also exercise informed judgementon the various strategy and policy choices


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Mechanisms of Corporate Governance

Directors representing private shareholders brought newperspectives to board deliberations, and the interests of privateshareholders began to have an impact on strategic decisions

The corporate governance structural reform measures includedmandating a higher proportion of independent directors on theboards

Inducting board members with diverse sets of skills and expertise

Setting up of board committees for key functions like riskmanagement, compensation, investor grievances redressal andnomination of directors

Structural reforms were furthered by the implementation of the

Ganguly Committee recommendations relating to the role andresponsibilities of the boards of directors, training facilities fordirectors, and most importantly, application of fit and propernorms for directors


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RBI guidelines on Fit and proper criteria for electeddirectors on the boards of nationalised banks

Under the provisions of Section 9(3)(i) of BankingCompanies (Acquisition and Transfer of undertakings) Act1970/80

(a) Authority: All the nationalized banks are required toconstitute a "nomination committee" consisting of aminimum of three directors (all independent/non-executive directors) from amongst the Board of Directors

(b) Manner and procedure: undertake a process of duediligence, obtain necessary information and declaration,the nomination committee should meet and decidewhether or not the person's candidature should be

accepted based on the criteria mentioned below.

The committee's discussions should be properly recordedas formal minutes of the meeting and the voting if doneshould also be noted in case of both existing andproposed Directors


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Fit and proper cont (c) Criteria:(i) Educational qualification (ii) Experience and

field of expertise (iii) Track record and integrity, ETC.,

The candidate coming to the adverse notice of anyauthority/regulatory agency or insolvency or default of any

loan from any bank or financial institution would make thecandidate unfit and improper to be a director on the Board ofa bank

(d) Other matters: It is desirable that the board ensures, inthe public interest, that the elected directors execute thedeed of covenants

All the elected directors must furnish a simple declarationevery year as on 31st March that the information alreadyprovided by them has not undergone any change and wherethere is any change, requisite details are furnished by thedirectors forthwith


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Corporate Governance in Banks (i) Responsibilities of the Board of Directors

A strong corporate board should fulfil the followingfour major roles viz. overseeing the risk profile of

the bank, monitoring the integrity of its businessand control mechanisms, ensuring the expertmanagement, and maximising the interests of itsstakeholders

(ii) Role and responsibility of independent and non-executive directors

Have a prominent role in inducting and sustaininga pro-active governance framework in banks


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Corporate Governance in Banks

(iii) Training facilities for directors

Need-based training programmes / seminars/workshops may be designed by banks to acquainttheir directors with emerging

developments/challenges facing the bankingsector

Committees of the Board

(a) Shareholders' Redressal Committee

(b) Risk Management Committee

(c) Supervisory Committee - monitoring of theexposures (both credit and investment) etc.,

(d) Audit Committee, (e) Customer ServiceCommittee (f) Compensation Committee


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Banking Regulation Act (Sec 10A) -

Board of directors

The Banking Regulation Act, 1949 provides thatnot less than 51% of the total number of membersof the Board of Directors of a banking companyshall consist of persons who shall have specialknowledge or practical experience in respect of oneor more of the following areas: viz., Accountancy,Agriculture and Rural Economy, Banking, Co-operation, Economics, Finance, Law, Small Scale

Out of the aforesaid 51% of directors, not less than2 directors shall have special knowledge orpractical experience in respect of agriculture andrural economy, co-operation or small-scale industry


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Journey of Corporate Governance

Banking Regulation Act, (BR Act) 1949 (Section10)

Listed banks are also expected to follow listingnorms under Clause 49 of the Securities andExchange Board of India (SEBI), in so far as theydo not conflict with the BR Act

In 1984, RBI circulated among private sectorbanks guidelines on the role and functions ofindependent/non-executive directors on the boardsof private sector banks

March 2001-Advisory Group by Dr R.H. Patil tobring CG in PSBs at par with international best

practices In 1992, RBI had also circulated a list of do's and

don'ts to the private sector banks, with a view tosensitising the directors on their role andresponsibility

Ganguly Committee Recommendations in 2002


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Journey of Corporate Governance..cont

The Banking Companies (Acquisition and Transfer ofUndertaking) Act, 1970/1980 were amended inOctober 2006 providing for introduction of fit andproper' criteria for directors elected in terms ofSection 9 (3) (i) of the Act

The Act also provides for: (a) an increase in the number of whole time directors

of nationalised banks from two to four

(b) nomination of up to three shareholder directorson the boards of nationalised banks on the basis ofpercentage of shareholding

(c) the RBI to appoint one or more additionaldirectors, if necessary, in the interests of bankingpolicy/public interest/interest of the bank or thedepositors


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Section 10A (2) (b) of the BankingRegulation Act, 1949 quality fit and

proper

Under this Act, directors should not have substantialinterest in a company or a firm. Substantial interest meansan amount paid-up exceeding Rs 5 lakh or 10 per cent ofthe paid-up capital of the company, whichever is less

Also, the Banking Regulation Act does not permit a bank tolend money to a company if any of its board members isalso a director on the board of that company. Thisregulation was introduced in the pre-nationalisation phase,when the banks were mainly in the private sector and mostof them were under the management control of one of the

industrial houses. This rule was introduced to preventcornering and possible misuse of bank funds by thecontrolling industrial houses.

The flip side is that there is no prohibition for interestedpromoter/shareholder of a bank to sanction a loan to acompany where he is a shareholder/has a substantialinterest but is not sitting on its board.


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Bank Corporate governance reports

Public sector banks tend to have larger boards, less busy(reputed) directors and greater rotation (retirements/appointments) of directors during a financial year. Thismakes their board less cohesive

Private banks have more stable boards that show little

movement during the year and across the five-year periodof the study

In April 2007, RBI has formulated a scheme for ProtectedDisclosures for Private Sector and Foreign Banks againstcorruption, misuse of office, criminal offences, etc.,

But a scrutiny of the top 20 banks (both public and private)

over a five-year period shows that just a few banks have awhistle-blower policy.

The exact role of the board in this regard is not discussedin any bank's annual report


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Thank you..

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