Bank boards under pressure to buy liability cover for bosses

Banks and financial entities are under pressure to take directors and officers (D&O) cover to limit the personal liability of their directors.

This follows the pressure imposed by private international venture capitalist firms insisting on a D&O cover. Participation by VCs comes in the wake of private sector banks seeking to reduce promoter holding in line with the Reserve Bank of India's guidelines.

"Non-executive directors are pressurising banks to take D&O cover to protect their personal assets, which could be at risk in the event of a lawsuit against the financial entity," said Kartik Iyer, manager, Howden India.

The rush for cover also follows the recent amendment by the Securities Exchange Board of India (Sebi) in Clause 49 of the listing agreement. This is with reference to the increased role to be played by non-executive directors.

LIC Housing Finance (LICHF) recently bought a D&O cover after going for a $ 50 million global depository receipts (GDR) issue. "Traditionally it is essential for the board to have a D&O cover as this gives comfort, especially when dealing with the US market," LICHF director and chief executive A K Dasgupta told Business Standard.

Since the housing finance entity went for a GDR, the directors were keen to ensure that any lawsuits filed by investors overseas would not put their personal assets under risk.

"Directors actively participated in the size of indemnity cover," said Dasgupta.

Andhra Bank, ICICI Bank, HDFC Bank, and UTI Bank are among the few which already have D&O covers in place. Few of the public sector banks have made enquiries and State Bank of India is expected to purchase a cover, said banking sources.

Incidentally, the imbroglio Global Trust Bank (GTB) also had a D&O cover in place last year. However, following the problems associated with the bank, the London market is understood not to have been willing to renew the cover.

With amendment made to the listing agreement whereby independent directors have a greater role to play, non-executive directors are insisting on D&O cover.

Sebi now states that chairman of the audit committee ought to be an independent director and at least two-thirds of the committee ought to be made up of non-executive directors.

Bharat Overseas Bank is also seeking D&O cover following the indirect pressure from the non-executive directors, said Iyer. Under the amendment to the listing agreement, non-executive directors or independent directors ought to make up 50 per cent of the board should a non-executive director be the chairman of the company.

"Non-executive directors are seeking limited liability as they get only seeking fees as opposed to full-time directors who have a say in the day-to-day running of the company plus get paid for the same," said the chief executive of a leading private insurance company.