Govt draws up plan to bolster PSU bank boards, hold directors accountable

With amendments to banking Act, it seeks to notify tenure for chairman

The central government is looking to strengthen the boards of public sector banks (PSBs) by specifying terms of office and conditions of service for whole-time directors, and also seeking disclosures from all directors about interests in other companies. Through the Banking Laws Amendment Bill, the government is likely to introduce conditions for disqualification of whole-time and independent directors which are not specified in the current legislation.

The Centre is seeking to introduce fresh changes that are aimed at strengthening the boards of PSBs, and holding their directors accountable, an official said. These amendments are being considered for the Banking Companies (Acquisition and Transfer of Undertaking) Act.

The changes being considered include specifying the tenure of chairman of public sector banks and conditions of their service. At the time when banks were nationalised, the chairman acted as a custodian of the bank, according to the Banking Companies (Acquisition and Transfer of Undertaking) Act. The government is considering making changes that shall replace the existing clauses in the Act. These changes are unlikely to impact State Bank of India (SBI), which is governed by a different statute.

To improve disclosures, directors on the boards of state-owned lenders will have to disclose their interest in any other company or bank as notified by the Centre, said the official quoted above. Provisions for the same may be included in the legislation.

The board of a government-owned bank is also likely to be empowered to constitute committees as it deems fit or on the advice of the Reserve Bank of India (RBI). 

The Centre may also specify conditions for directors for entering into any contract or arrangement with a related party. It is also looking to allow a fresh scheme for the board of directors of PSBs that would specify the number of directors who can be notified by the Centre, and the number of directors who can be appointed by shareholders, consequent to their shareholding.

Currently, the Union government can appoint six directors. In cases where shareholders own 16 per cent shares, they can appoint one director; those owning 16 per cent to 32 per cent, can appoint two directors; and those owning more than 32 per cent stake, can appoint three directors.

The changes are aimed at replicating similar compliances by private banks at a time when the Centre is looking at privatising two PSBs, and at the same time retaining some stake in them, at least initially.

The Centre is also seeking to remove the 10 per cent shareholding cap for individuals in PSBs to help private equity (PE) firms pick up stakes in the PSBs on the block for privatisation, Business Standard reported last week. 

The government is yet to take a final call on the quantum of the stake it would retain initially. In the previous draft of the banking amendment laws that the Centre was planning to move in the Winter Session of Parliament, the government had sought to retain 26 per cent in PSBs, even after privatisation.

Even as the Centre has not listed the Banking Laws Amendment Bill for the upcoming Monsoon Session of Parliament starting Monday, the government can still introduce changes to the Banking Companies (Acquisition and Transfer of Undertaking) Act during the session after the Cabinet’s approval.

Bolstering the board

• Centre may replace existing clauses relating to appointment of board of directors

• May empower board to constitute committees as they deem fit

• Changes may allow new scheme for board of directors

• Currently, Centre can appoint 6 directors on PSB boards

• Centre has not listed amendments to the Bank Nationalisation Act for Monsoon Session