The market is merciless in evaluating bank performance and corporate governance standards. If the government does not wake up to streamline entire system of appointment of Directors, all of us may have to repent in leisure
The discovery that Sunil Gupta, a director on the board of Canara Bank was related to former railway minister Pawan Kumar Bansal, has raised a justifiable furore. He made his entry on the board as a part-time government nominee and then just before the end of his three-year term, was elected as a shareholder director because of his closeness to Mr Bansal, who was then the minister of state for finance.
The case clearly calls for a thorough appraisal of the system of appointment of directors on the boards of public sector banks (PSBs). Whether or not Sunil Gupta influenced the bank to get undeserved loans for Bansal’s companies is a separate issue, which is under investigation.
It is well known that ever since the banks were nationalised in 1969, every government at the Centre has used its authority to appoint directors, many of whose claim to the position is no more than their political affiliation. Although there are broad guidelines regarding the qualifications of those who occupy these posts, they are interpreted with elasticity. Thus, for example, there is another part-time nominee director under the category of Chartered Accountant appointed on the Canara Bank board who does not have the minimum 15 years experience stipulated under clause 9 of the Bank Nationalisation Act. Neither the RBI nor the government, which was consulted on the matter, did elementary due diligence with regard to his background, because his candidature was sponsored by another big-time politician. This has not even attracted media attention.
Many of these politically connected nominee directors routinely get a second term with a small gap of three to six months before the second term appointment comes through. In Sunil Gupta’s case, to avoid even this tiny gap, he was elected as a shareholder director immediately. Since the regulations permit a maximum of two terms, these influential, politically connected directors smoothly move over to another public sector bank as shareholder directors. Incidentally, the connections are not necessarily with politicians alone—powerful bureaucrats also get their personal chartered accountants appointed to bank boards with regularity.
Consider this example. Shabeer Pasha, a two-term government nominee on Canara Bank’s board moved on to become a shareholder director on the board of Corporation Bank. The fact that he is the son in law of Rahaman Khan, a central minister could not be incidental. There are many such examples at almost every bank’s board. In contrast, the government appointed several professional directors on the Indian Bank board (then rated as one of three weak banks) in March 2001 to help its then chairperson, Ranjana Kumar in the arduous task of reviving the bank. It then had a negative net worth of nearly Rs5,000 crore. Once the bank came back achieved a financial turnaround, all these professional directors were given the marching orders at the end of a three-year term, without even reconstituting the board. Such is the capricious nature of political appointments.
The government needs to re-visit the Cadbury Committee and other corporate governance reports and its own circular of February 2005 on the autonomy of banks which is packed with a number of progressive measures that remain on paper. In fact, the government as the owner of PSBs and the Reserve Bank as the regulator, must review the working of the Boards periodically, including the attendance and participation of nominee directors in the deliberations at board meetings.
Today all the banks are publicly listed and they need increasing amounts of capital and long-term funds for their operations. Given the government’s budgetary constraints, resorting to fund raising from the capital market by banks is inevitable. The market is merciless in evaluating bank performance and corporate governance standards. If the government does not wake up to streamline entire system of appointment of Directors, all of us may have to repent in leisure.
(The writer is the former CEO of a bank)