The central government has reserved its veto on key powers being delegated to the Reserve Bank of India with regard to dealing with top management of banks. The move was done through a notification by Ministry of Corporate Affairs (MCA) recently and is likely to take effect once it is published in the official gazette.
According to the notification dated December 21, “the central government hereby delegates its powers under section 388B, 388C and 388E of the said act (Companies Act, 1956) in relation to banking companies falling within the purview of the Banking Regulation Act, 1949, to the Reserve Bank of India.”
Interestingly, the delegation is not absolute as it comes with a ‘public interest’ rider. The notification says that the move is subject to a condition that “the central government may revoke such delegation of powers or may itself exercise the powers under the said sections, if in its opinion, such a course of action is necessary in public interest.” Thus, while RBI will have new powers, the government acting through MCA will have a veto.
Earlier, the Parliament has passed Banking Amendments Bill, which among other things gave RBI powers to overrule bank boards. These sections in the company law deal with powers to take action against board members including initiating enquiry against and removal of directors for any misdeeds. Section 388B gives powers to initiate proceedings against managerial personnel in cases of “fraud, misfeasance, persistent negligence or default in carrying out his obligations and functions under the law, or breach of trust.”
It also empowers the RBI to initiate action if there are circumstances to believe that business is conducted “in a manner prejudicial to public interest.”
Section 388C deals with restricting managerial personnel from discharging duties and appointing other suitable persons in place of such personnel, who are being proceeded against.
Section 388E empowers the RBI to remove managerial personnel. The person against whom an order of removal from office is made under this section shall not hold the office of a director or any other office connected with the conduct and management of the affairs of any company during a period of five years from the date of the order of removal.
The move, that experts say strengthens RBI’s hands considerably, will enable the central bank to move ahead on grant of new banks licences. “These changes will help RBI obtain a tighter control over operational issues. RBI wanted to get these powers before issuing new licences. But these provisions will also help RBI regulate the existing private banks better,” a consultant who is advising some bank licence aspirants said.
Shinjini Kumar, director, tax and regulatory services, Pricewaterhouse Coopers said, “My understanding is that these are enabling provisions to give RBI powers of what is there in the companies act. Without the provision they couldn't have had the powers as these companies are governed by the companies act.”
Kumar added that whether RBI will actually start inspecting remains to be seen. “It is not going to be easy to see all the balance sheets. But we will have to wait and see the final guidelines.”
