The UBI Saga Exposes Many Warts

SEBI is hell bent on making the corporate governance norms more and more tough. Its silence about United Bank of India saga shows how bogus its avowed stance is

On 13th February, the Securities & Exchange Board of India (SEBI) revised its corporate governance code, for the third time, making it stricter. The new code, effective October 2014, expects to ‘empower the board’ to ensure legal and ethical conduct of management. It also wants the board to evaluate, reward and, if necessary, remove senior management and ensure succession planning. The code, says an academic’s review, will create an ‘empowered board’ that is always vigilant, as opposed to a ‘passive board’ that usually gets active only during a crisis.

This strict code, with many laudatory provisions, will apply to all companies listed on our stock exchanges. Or will it? Look closely, and you can see that none of the new provisions will apply to the entire swathe of listed public sector undertakings (PSUs) that have inflicted big losses on investors. This is evident from the fact that neither SEBI nor the stock exchanges, who administer the corporate governance code through their listing agreement with companies, have uttered a word about the goings on at United Bank of India (UBI) that have mauled its share prices.

On 22nd February, its chairman & managing director (CMD), Archana Bhargava, suddenly opted for voluntary retirement citing health reasons. The finance ministry instantly accepted her application and allowed her to vanish from public view; she has not responded to our queries.

Ms Bhargava was allowed to opt for voluntary retirement after Reserve Bank of India (RBI) governor, Dr Raghuram Rajan, formally asked the government to remove her and supersede the entire board of the Bank.

Four days after Ms Bhargava’s exit, UBI’s board remains paralysed and unclear about its own future; the Bank is being jointly run by two executive directors. Anonymous sources, quoted in media reports, say that the board is unlikely to be superseded, despite the banking regulator’s recommendation, because it is a ‘politically sensitive time’. So, how will SEBI’s new corporate governance code help UBI investors who, at the very least, are entitled to a proper disclosure of facts from the board of directors? Do PSU boards have truly independent directors or empowered audit committees? Will they be exempt from the tough new norms and punishments prescribed by the SEBI code and the new Companies Act? The answer is: Yes.

Someone like Rajiv Takru, secretary (financial services), ministry of finance, will always call the shots at listed PSU banks. Management succession and remuneration will never be within the purview of these boards; but government appointees will continue to wield enormous influence on behalf of their political masters, crony capitalists and influence-peddlers. Investors, like those of UBI, who have lost over 70% of the value of their holding—the share price declined from Rs85 in January to around Rs25 (at the time of writing)—won’t even know who to demand answers from. Their source of information will continue to be media reports quoting anonymous sources.

Consider another angle. Reliable sources in the banking industry and the Bank say that Ms Bhargava may have exaggerated the bad loans below Rs10 lakh. For this, she blamed the core banking software (supplied by Infosys Ltd) which was unable to detect these. She is also accused of reckless lending by her own senior officers. These sources say that she was bent on declaring the entire portfolio, running into over Rs2,000 crore, as non performing assets (NPAs), which is a huge exaggeration. Many of these loans, they say, are likely to be written back in the coming months. If this happens, the share price may rise and investors who sold in a panic have reasons for serious complaint. Who will SEBI hold accountable? The passive board which does not even know its own fate? The government, as owner of UBI, for failing to make full and proper disclosures to shareholders? The RBI, as banking regulator, which remains secretive and does not disclose the true state of UBI’s finances or respond to rumours about merging the Bank with a stronger one? Clearly, the accountability of PSU bank boards or management is a hoax on investors.

If corporate governance norms do not apply to giant PSUs, or make a difference to politically connected companies like Kingfisher Airways, LANCO (of pepper spray in parliament fame) or NDTV, what is the purpose of tinkering with the rules? Our regulators, like our investigation agencies, will nitpick on compliance and harass companies who follow the rules or are not powerful enough block action. The same regulators will maintain a studied silence over the massive rise in bad loans of public sector banks that have even caused their unions to panic. SEBI is also silent about the misuse of funds by large corporate houses that use their political clout to get bad loans restructured repeatedly.

Here is yet another aspect to the governance conundrum in PSUs. In just over a year at UBI, Ms Bhargava precipitated a crisis by antagonising her entire board of directors over declaration of higher NPAs. She wrote to RBI asking for a forensic audit of UBI’s loans, since neither the RBI inspection nor the Bank’s external auditors had recognised the true extent of the rot in the Bank. Bad loans at the Bank trebled—from Rs2,964 crore in March 2013 to Rs8,546 crore in December 2013. The Bank, which was ‘profitable’ until the first quarter of 2013-14, reported a Rs489-crore loss in the second quarter which spiralled to Rs1,238 crore in the December quarter. Was this an accurate representation of the Bank’s finances? Nobody knows. The RBI governor’s letter, recommending Ms Bhargava’s removal, suggests that it does not see her as a crusading clean-up agent. However, our sources say that there is, indeed, a big increase in bad loans at UBI; but this is in line with those of all public sector banks. They also agree that much of her provisioning was high and, probably, exaggerated.

In fact, SEBI has allowed it to become a tradition for incoming chairmen at PSU banks (including State Bank of India) to declare higher NPAs so that their own performance shines in comparison to their predecessor’s. In a listed company, this would amount to a deliberate attempt to depress the stock price and ought to be investigated under price manipulation and insider trading rules. Will SEBI dare to launch such an investigation and initiate action? Or will Archana Bhargava and the UBI board of directors be allowed to fade away without accountability for her actions or consequences?

Let us now look at another aspect of how UBI and other listed PSUs make a mockery of SEBI’s corporate governance code. The universal view at RBI and UBI is that Ms Bhargava had extremely poor people skills and rode roughshod over her board of directors and senior management. However, neither shareholders nor employees have a say in the selection process.

Everybody knows that most appointments (barring rare exceptions) as bank chairmen are the result of hectic lobbying and dubious deal-making with corporate houses, brokered by notorious chartered accountants who turn up as finance ministry appointees at many banks. So Ms Bhargava, despite her patchy track-record at Canara Bank and Punjab National Bank about the quality of loans and other transgressions, apparently managed to bag a coveted assignment.

When hundreds of listed government companies (representing the largest block of assets) have no control over the appointment of their board of directors or their chairman and managing director, how fair is it for SEBI to keep making corporate governance rules more onerous?

Sucheta Dalal is the managing editor of Moneylife. She was awarded the Padma Shri in 2006 for her outstanding contribution to journalism. She can be reached at [email protected]

Comments
Raj under Goswami
8 years ago

At the highest level of any organisation, especially financial organisations - which deal with the public money, only persons with high integrity and not those clouting high connections, should be posted. It is pity that such vital aspect is generally ignored in the prevailing system.
However, it is heartening to learn that UBI may bounce back to profits by reducing NPA by more than Rs.2000/- crore (Business Standard, Apl 4 2014). If the constant supervision of RBI and efforts of exiting bank officials at the helm of affairs can bring about this transformation, it will be an appreciable task.
Dayananda Kamath k
9 years ago
before accepting a resignation or voluntary retirement from an officer in public sector bank.a detail search of all his actions at every posting in the bank is checked and a clearence of no liability or likely liability of his actions is verified.but how a cmds application can be accepted in single day. the person who accepted and all others who delat the matter and approved should also be braught to book. so tha such things do not recur.
KAVIRAJ B PATIL
9 years ago
When the government is not bothered about replacing batteries for submarines thereby endangering our national security, the fall of one bank is not significant for them to change their ways. All public sector banks are basically meant to cater to the whims and fancies of their political bosses only.
PRAKASH D N
9 years ago
Your can find Corporate Governance in PSBs only in their annual report, seldon in practice. The Ganugly Committee recomendations which prescribes minimum corporate governnance norms in Board functioning itself is observed in breach. Board Meetings are led by the CMD and in a few cases CMD, Ministry Director and RBI Director. Other in(dependent) Directors are passive spectators. Board Meeting which last for 2 hours, 80 to 100 agenda items are cleared. Rarely the observations of the Directors are recorded. Board decisions too appear in single line without any discussion part. In one day Board meetings, Management Committee meetings (which sanctions loan proposals), other committees of the Board etc.. all gets completed within hlaf day!

Whether RBI/ Ministry is not aware of these things? Everyone will wake up only during a crisis. Rest of the time life goes on. Long live Corporate Governance!
Gopalakrishnan T V
9 years ago
The author has come out clearly as to how Corporate Governance principles are not being adhered to in PSUs particularly in PSBs sighting the example of United Bank of India and its recent revelations.The SEBI frames rules to be pursued to ensure Corporate Governance in Corporates but it seldom ensures adherence is a fact known to all Corporates and market players. Corporate Governance in Banks particularly in PSBs are only in paper and the Government Director and Chairman as dictated by the Government have their own principles of Governance where even RBI the sole regulator of banking has limited say.These shortcomings in the adherence to Corporate Governance rules are known to all but the connections, lobbying, contacts and other under currents in the actual functioning of the Corporates including banks have a destination not known to many.Fortunately banks are not allowed to fail thanks to Government backing using tax payers money as otherwise left to themselves many banks would have failed long back. The UBI was havibg severe problems and was categorised as weak bank along with other two PSBs in the late 1990s and all the three were saved with the strong backing of the Government. Corporate Governance and even other Governance Standards are missing in our system is a truth and ethics and values are concepts only to be found in discourses.
Bhaskar
9 years ago
There is underinvestment in skills in PSBs simply because promotions are given for non-performance and proximity to the top. Vertical accountability and not horizontal accountability has caused serious decline in the work culture of PSBs
Yerram Raju Behara
9 years ago
Top assignments in PSBs depend upon the effectiveness of lobbying and not on performance. Once the persons reach the General Manager level, the game starts. They start acquiescing to pressures to cling to the chair or jump up.
If some one is at zero level and not much has been done to elevate him/her, it does not mean that others should be also allowed to remain at the same level. Why accuse SEBI if they want to impose CG on the corporate sector more than the banking sector that has multiple regulators. The RBI and Finance Ministry derive comfort in lazy boards. Their nominees endorse the controversial Board resolutions only to go back and raise correspondence on them and not even in the next Board meeting they raise the issue nor does the Chairpersons or other Directors ask why these questions were raised. They are dealt with from the management side. If somebody thinks that there is CG in PSBs it is his or her fault. There are only namesake Boards. This is one of the reasons, perhaps for the RBI Governor to set up a Committee to look into CG in Banks under the Chairmanship of Dr.P.J. Nayak. When a similar Committee's Report under Ashok Ganguly was consigned to cupboards, it is a matter of doubt whether the new Committee would be able to have its way in action finally. PSBs are management-led and not Board-led. It is the RBI that should act swiftly and not bow to the Finance Ministry.
sathyacumaran
Replied to Yerram Raju Behara comment 9 years ago
sathyacumaran
All these reports and committees after finding some scams are just to divert the attention of public from this and ultimately its our money which had been misused how are much whether they are educated person like Arachana Bhragava or any body if they politicial clout through them if they come to power its 100% sure that there is going to looting of banks assets is sure because once the Govt appoints then as chairman then they would ask the chairman to lend money to those companies where politicians are shareholder or his company and natural once it goes to these companies its only bad debts to be written off and since the chairman had come through back doors naturally the chairman also inorder to safeguard her or his position they also loot and keep the buffer money and cost of bank and as such in india the credbility and accountability and integrity is totally lost which is bad sign for an countries future
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