RBI to sensitise boards of pvt banks on liability of independent directors

Central bank to brief boards on governance standards; may tighten fit-and-proper criterion

The regulatory noose for private banks will be tightened, with the Reserve Bank of India (RBI) setting in motion an exercise to “sensitise” their boards on the liability of independent directors under the Prevention of Corruption Act (PCA), Companies Act, and the Criminal Procedure Code (CrPC) if they are found wanting in the discharge of their duties. The central bank may even tighten the fit-and-proper criterion for such directors.

The central bank’s move comes two years after a decision by the Supreme Court (SC) in 2016, which observed “officers” of private banks are “public servants” under the PCA. The immediate trigger is the Central Bureau of Investigation’s (CBI’s) first information report, which named two independent directors of IDBI Bank, Ninad Karpe and S Ravi, over a Rs 6-billion loan given by it to former Aircel promoter C Sivasankaran, even though the bank is not a private one; it is government-owned, but not nationalised.

“While no formal communication has been sent to us, the RBI’s Department of Banking Supervision has in interactions asked us to inform them of an upcoming board meeting, so that they can brief members on the subject,” said a senior private bank official. He added that of late, officials of the CBI, too, have started addressing bankers at the Centre for Advanced Financial Research and Learning (CAFRAL) in Mumbai, which is an independent body set up by the RBI.

The drill as on date is that minutes of all banks’ board meetings are sent to the RBI as part of the documentation which forms part of annual inspections. A senior banker said that the less-than-savoury developments at ICICI Bank and the variation in the disclosed levels of non-performing assets at a few private banks, when compared to the RBI’s assessment of the same (especially after its asset quality review), also led the central bank nudge on the role of independent directors.

The latest development is one more act of a play, which started with the SC’s ruling in October 2016; it put the spotlight on Section 2(b) and Section 2(c)(viii) of the PCA and Section 46A of the Banking Regulation Act. 

Section 2(b) of the PCA defines public duty as a “duty in discharge of which the State, the public or the community at large, has an interest”. 

It provides for the explanation: “In this clause, ‘State’ includes a corporation established by or under a central, provincial or State Act, or an authority or a body owned or controlled or aided by the government or a government company as defined in Section 617 of the Companies Act, 1956, (1 of 1956)”. Section 2(c)(viii) of the PCA defines a public servant to be any person who holds an office by virtue of which he is authorised or required to perform any public duty. 

Section 46A of the Banking Regulation Act states that, every chairman who is appointed on a whole-time basis, managing director, director, auditor, liquidator, manager, and any other employee of a banking company, shall be deemed to be a public servant for the purposes of Chapter IX of the Indian Penal Code (IPC). Chapter IX of the IPC deals with offences by or relating to public servants.

The PCA (Amendment) Bill, 2013, sought to include private players into the ambit of the PCA; and the SC judgment paved the path to strengthen anti-corruption enforcement measures in the private arena.

PINCER MOVES

• RBI officials to brief bank boards on role of independent directors

• To sensitise directors on their liabilities under PCA, Companies Act, and CrPC

• Fit-and-proper criterion may see change

• CBI officials start briefing bankers at RBI’s CAFRAL

• Move prompted by SC ruling on private bankers being deemed as public servants

• CBI probe into IDBI-Aircel, l'affaire Chanda Kochhar prompts move

• RBI also worried over divergence in NPAs of private banks with asset quality review