Companies & Sectors
Election of shareholder directors in public sector banks is a farce

The inescapable inference from the facts is that the election of shareholder directors in all public sector banks is a farce or just a backroom manoeuvre to get persons of its choice on board. It is time for the government, RBI and SEBI to frame rules for election of shareholder directors

Public sector unit (PSU) banks (PSBs) continue to maintain a unique position even as listed companies. The Indian government has majority shareholding in all PSU banks and public shareholding is in the range of 10% to 45%. Yet, many provisions of the Listing Agreement with stock exchanges are not applicable to them. Perhaps, the logic is that these PSBs are substantially supervised by the Reserve Bank of India (RBI) and the government. Canara Bank, with a public shareholding of 32.3% is one such example. 

 

Now let’s look at how shareholder directors are appointed at these banks. Under section 9[3][i] of the Bank Nationalisation Act 1970, public shareholders have a right to elect a director for every 16% of the shareholdings or fraction thereof. Canara Bank had three vacancies for shareholder directors under this provision, when it held its Annual General Meeting (AGM) on 22 July 2013. Eight individual shareholders who applied for election were considered ‘fit and proper’ and hence eligible to get elected on the board of directors.

 

Accordingly, a notice was published in newspapers and sent to all shareholders, including institutional shareholders. The notice contained only names and postal addresses of the candidates. This scanty information apparently satisfies the provisions of the Bank’s own Regulations—other PSU banks have similar provisions to ensure brevity and opaqueness. Absolutely no other information about the candidates such as their experience, in which field they have special knowledge, their age, qualifications, shares held by them is not provided.

 

Let’s not go to the Canara Bank AGM. The chairman and managing director read out the names of each of these potential directors and mentioned that they were all chartered accountants (CAs), except one, who was an engineer. He further said that all but one have been directors on the Boards of public sector banks. How on earth is anybody to know who is best qualified to be a director of the Canara Bank on the basis of this scanty information? It is as good as tossing a coin.

 

What is however apparent is that these CAs have been rotating as directors of various banks probably by the dint of their political connections. Is it possible that the RBI has never noticed this? In fact, every few years there is a scandal related with CAs who are on bank boards’ due to their political clout, which is extensively reported in the media. Yet, the RBI either pretends not to notice or does not want to take on the political establishment on many different fronts – it is already involved in a fairly public war with the finance ministry over interest rates and how to control inflation. In other words, the pressures of handling the dual role of monetary authority and banking regulator leads to a situation where the regulatory function is allowed to slip.

 

But let’s stick to two important facts here. First, that Canara Bank failed to provide full and proper information about the potential ‘public’ directors to all its shareholders. All they received was just name and address. But nobody seems to have asked either – not even institutional investors – so much for SEBI’s newly created role for proxy advisors.  Secondly, only those who physically present at the AGM were told that the qualifications of the potential directors. Shouldn’t the CMD of the bank be held accountable? Consider the numbers – Canara Bank has 1.15 lakh shareholders and only 300 to 400 of these attended the AGM, including authorized representatives of institutional shareholders.

 

Since the selected candidates need the backing of institutional shareholders, the question is, how do these institutions decided to vote in favour of one candidate or the other without any worthwhile information? Did they get information on the contestants? Is there behind the scenes lobbying? We know for a fact that there is. Or, do they simply get a call from powerful politicians and bureaucrats telling them who to elect?

 

There are two problems with this. First, there is clear discrimination in favour of those who are able to attend the AGM. SEBI needs to intervene in this regard to ensure that all shareholders are treated fairly and have access to the same information -- this is notwithstanding restrictions on its powers under clause 49 of the Listing Agreement with regard to PSU banks. Secondly, it is SEBI’s job to figure out whether institutional investors were either favoured or not favoured by the Bank with any additional information, which was denied to other shareholders.

 

Now let’s come to the results of the election, which point to some irresistible conclusions. Of the three contestants, two got more than 5.25 crore votes and the next one over four crore votes. Sunil Gupta - a distant fourth received a little over one crore votes. Apparently, the first three got heavy backing of institutions based on sketchy information. Isn’t it clear that they acted in concert? Since institutional representatives made a trip to Bengaluru to attend the AGM, they were carrying out the mandate of their managements. So did these institutions do their own diligence about the suitability of candidates?

 

The inescapable inference from the facts given above is that the election of shareholder directors in all banks is a farce; it is a backroom manoeuvre by the bank to get persons of its choice. Or can we say, a more serious case akin to gerrymandering [defined in Wikipedia as “exclusion of opposition candidates from eligibility for office, and manipulating thresholds for electoral success are some of the ways the structure of an election can be changed to favour a specific faction or candidate”].

 

It is time for the government, RBI and SEBI to frame rules for election of shareholder directors in Public Sector Banks, which are clear, transparent and non-discriminatory, if such directors are to be called truly independent directors instead of being pro forma directors to do the bidding of management and or the government. The banks being increasingly dependent on capital market for equity, now is the time to end the farce.

User

COMMENTS

Rajiv Mehra

3 years ago

Shareholder directors are expected to represent the minority shareholders interest on the bank's board. Accordingly, GOI chooses not to vote in such elections.

However, Institutions owned/controlled by the Government, viz LIC, other insurance companies and banks are allowed to participate in such election process.

With recent amendment in banking act, voting power of shareholders have increased from 1% to 10%. LIC owns over 10% shareholding of most banks.

In the current situation, LIC's vote alone can easily decide the result for shareholder election. LIC normally decides voting preference in consultation with the Ministry of Finance.

GOI need to make up its mind on the issue, if they are serious about having representation from minority shareholders, they must advice all PSU shareholders viz. LIC, Insurance Companies, banks, etc. not to vote in such elections and let other shareholders participate in such elections and get their representative.

PATTABHI

3 years ago

It was always so, not merely in Banks, but other Industries as well..The way AGMs are planned and conducted is an art by itself.

ANIL KUMAR JALOTA

3 years ago

It is no news. It has been going on since ages . It is stage managed by politicians through Deptt of banking. Ask any CMD who retired from PSB in last 2-3 decades. You can easily trace part of the problems relating to NPAs to govt appointed directors including shareholder director. CMD shall be directed to manage votes by collecting proxies.

REPLY

S BHASKARA NARAYANA

In Reply to ANIL KUMAR JALOTA 3 years ago

May not be news for CMDs and politicians, but astonishing NEWS for the common shareholder, like me.

R Balakrishnan

3 years ago

After reading about Yes Bank, do we think private is any different? Everywhere, the owner (private owner or the govt dept) fixes its own persons. Independent directors are found only in articles and seminars. Why would any promoter want someone to probe in to what he is doing? The shareholder has no say, unless he owns a substantial chunk of, say, 10% of voting powers, to even create a nuisance.

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