RBI caps tenure of bank MD/ CEO and issues direction on composition of the board

The Reserve Bank of India on Monday issued certain instructions on the governance for banks, including private banks, Small Finance Banks (SFBs), Wholly Owned Subsidiaries of Foreign Banks (not applicable to foreign banks operating as branches in India). In respect of the State Bank of India and Nationalised Banks, these guidelines would apply to the extent the stipulations are not inconsistent with provisions of specific statutes applicable to these banks or instructions issued under the statutes. “The contents of this circular must be read along with other relevant governing statutes and shall be applicable notwithstanding anything to the contrary contained in the licensing conditions, notifications, directions, regulations, guidelines, instructions, etc., issued by the Reserve Bank before the issue of this circular” RBI said. The applicability to other commercial banks viz., Local Area Banks, Payments Banks, and Regional Rural Banks will be notified separately, it added.

In order to address a few operative aspects received through a Discussion Paper on ‘Governance in Commercial Banks in India’ feedback, it has been decided to issue instructions with regard to the Chair and meetings of the board, composition of certain committees of the board, age, tenure and remuneration of directors, and appointment of the whole-time directors (WTDs), the central bank communication said.

The post of MD and CEO or Whole Time Director (WTD) cannot be held by the same incumbent for more than 15 years, said RBI. “Thereafter, the individual will be eligible for re-appointment as MD&CEO or WTD in the same bank, if considered necessary and desirable by the board, after a minimum gap of three years, subject to meeting other conditions,” it said. During this three-year cooling period, the individual shall not be appointed or associated with the bank or its group entities in any capacity, either directly or indirectly, it is stated. However, this will not preclude him/her from being appointed as a director in another bank subject to meeting the requirements it added.If the MD &CEO or WTD is also a promoter/major share holder, he cannot hold these posts for more than 12 years. However, on extraordinary circumstance, at the sole discretion of RBI he may be allowed to continue up to 15 years. “While examining the matter of re-appointment of such MD&CEOs or WTDs within the 12-15 years period, the level of progress and adherence to the milestones for dilution of promoters’ shareholding in the bank shall also be factored in by the Reserve Bank,” it said. The upper age limit for Non-Executive Directors (NED), including the Chair of the board, shall be 75 years and after attaining the age of 75 years no person can continue in these positions, the regulator said. It is further clarified that the upper age limit for MD & CEO and WTDs in private banks would continue to be 70 years. Within the overall limit of 70 years, as part of their internal policy, individual bank’s Boards are free to prescribe a lower retirement age for the WTDs, including the MD&CEO.

Chair and meetings of the Board:  The Chair of the board shall be an independent director. In the absence of the Chair of the board, the meetings of the board shall be chaired by an independent director. The quorum for the board meetings shall be one-third of the total strength of the board or three directors, whichever is higher. At least half of the directors attending the meetings of the board shall be independent directors.The Chair of board who is not an independent director on the date of issue of this circular shall be allowed to complete the current term as Chair as already approved by the Reserve Bank.  The MD&CEOs or WTDs who have already completed 12/15 years as MD&CEO or WTD of the bank, on the date these instructions coming to effect, shall be allowed to complete their current term as already approved by the Reserve Bank.On the transition arrangement, the central bank said, “While the instructions shall come into effect from the date of issue of this circular, in order to enable smooth transition to the revised requirements, banks are permitted to comply with these instructions latest by October 01, 2021.”

Other committees:

The audit committee of the Board (ACB) shall be constituted with only non-executive directors (NEDs). The Chair of the board shall not be a member of the ACB. The ACB shall meet with a quorum of three members. At least two-thirds of the members attending the meeting of the ACB shall be independent directors.

 Risk Management Committee of the Board (RMCB) shall be constituted with a majority of NEDs. The RMCB shall meet with a quorum of three members. At least half of the members attending the meeting of the RMCB shall be independent directors of which at least one member shall have professional expertise/ qualification in risk management.

The nomination and Remuneration Committee (NRC) which is formed by NEDs shall not be chaired by the Chair of the Board. At least half of the members attending the meeting of the NRC shall be independent directors, of which one shall be a member of the RMCB and the chair should be an independent director.