The Hindu Business Line

‘Govt must set clear ob­jec­tives, man­dates for PSBs’

Lenders must fully com­ply with dis­clo­sure and trans­parency norms and their boards need to func­tion in­de­pen­dently, says Uday Ko­tak

- K RAM KU­MAR Business · Finance · Maryland · India · World Bank · Securities and Exchange Board of India · Kotak Mahindra Bank · Kotak Mahindra Bank

Pub­lic sec­tor banks (PSBs) can ad­vance the cor­po­rate gov­er­nance curve in phases by en­sur­ing that they fully com­ply with dis­clo­sure and trans­parency norms (in­clud­ing those re­lated to SEBI reg­u­la­tions), their top man­age­ment gets longer ten­ure, and the boards func­tion in­de­pen­dently, ac­cord­ing to top banker Uday Ko­tak’s rec­om­men­da­tions to the Fi­nance Min­istry.

Ko­tak, MD and CEO of Ko­tak Mahin­dra Bank, sug­gested that th­ese banks should fully com­ply with the ex­ist­ing pro­vi­sions of Securities and Ex­change Board of In­dia (SEBI) reg­u­la­tions, in­clud­ing List­ing Obli­ga­tions and Dis­clo­sure Re­quire­ments (LODR), and the same must be ef­fec­tively en­forced.

This is aimed at deal­ing with cases of lapses (some of them per­tain­ing to board of di­rec­tors com­po­si­tion, limit on num­ber of di­rec­tor­ships) in com­pli­ance with SEBI reg­u­la­tions by listed PSBs

Call­ing for a re-look at statu­tory ex­emp­tions to PSBs, Ko­tak, who headed SEBI’s Cor­po­rate Gov­er­nance Com­mit­tee, un­der­scored that th­ese bank must abide by the same gov­er­nance, re­port­ing, con­trol, and au­dit frame­works as other sig­nif­i­cant cor­po­rate or pub­lic in­ter­est en­ti­ties, since they have raised pub­lic monies and the in­vestors have a right to in­for­ma­tion, which is on a par with those they re­ceive from listed en­ti­ties.

Statu­tory ex­emp­tions

The state-owned banks are pro­vided with cer­tain statu­tory ex­emp­tions, pri­mar­ily from the Bank­ing Reg­u­la­tion Act, 1949, SEBI Reg­u­la­tions and Com­pa­nies Act, thereby giv­ing rise to unique cor­po­rate gov­er­nance chal­lenges, un­like their pri­vate sec­tor coun­ter­parts.

Thus, if the goal of bet­ter cor­po­rate gov­er­nance needs to be achieved, there is a need to ad­dress th­ese statu­tory ex­emp­tions pro­vided to PSBs, the banker elab­o­rated in a report pre­pared by the fi­nance min­istry. Given that glob­ally Uday Ko­tak, MD and CEO, Ko­tak Mahin­dra Bank

state-owned en­ter­prises are run with dual ob­jec­tives (fur­ther­ing the state pol­icy and fur­ther­ing com­mer­cial ob­jec­tives), which may from time-to-time ap­pear to be dis­cor­dant, Ko­tak sub­mit­ted that to en­hance trans­parency, the gov­ern­ment must set clear ob­jec­tives and man­dates for the PSBs.

And where there are non-com­mer­cial ob­jec­tives, th­ese should be clearly ar­tic­u­lated, quan­ti­fied, and trans­par­ently dis­closed to the share­hold­ers on a reg­u­lar ba­sis so that in­vestors can take in­formed in­vest­ment de­ci­sions.

Longer man­age­ment ten­ure

Ko­tak, who has been at the helm of his bank since in­cep­tion in 2003, pro­posed that the re­tire­ment age of PSBs’ top man­age­ment should be relooked at, in line with that of pri­vate sec­tor banks’ whole-time di­rec­tors. The need of the hour is to ap­point them for a longer ten­ure. This can then achieve the ob­jec­tive of con­ti­nu­ity, lead­ing to long-term fo­cus with­out dis­rupt­ing the strate­gic ob­jec­tives.

The banker ob­served that the man­age­ment at PSBs is sub­ject to change ev­ery three years, which may not be in the best in­ter­est of a com­mer­cial en­ter­prise. This leads to a lack in vi­sion and long-term strat­egy of the PSB, and of­ten leads to de­ci­sion-mak­ing which is short­term in nature.

Presently, bankers get ap­pointed to top man­age­ment po­si­tions in PSBs a little too late in their ca­reer for them to have ad­e­quately long tenures.

Ko­tak ad­vo­cated that se­nior man­age­ment com­pen­sa­tion be bench­marked against the in­dus­try with some trans­par­ent ad­just­ments. This will en­sure qual­ity tal­ent is at­tracted and is well com­pen­sated.

For se­nior man­age­ment, there can also be long-term em­ployee stock op­tion plans (ESOPs) as part of in­cen­tives. This can also in­cen­tivise em­ploy­ees to think for the long term. Also, the selection to lead­er­ship roles must not just be based on se­nior­ity, but due con­sid­er­a­tion should be given to ex­per­tise, skill sets, and other fac­tors.

Re­fer­ring to the rec­om­men­da­tions of the World Bank Tool Kit on Cor­po­rate Gov­er­nance of sta­te­owned en­ter­prises, Ko­tak ad­vo­cated de­vel­op­ing such a frame­work, which re­quires com­mon and clearly un­der­stood prin­ci­ples of ac­count­abil­ity and gov­er­nance. In many coun­tries, re­forms of state-owned en­ter­prises show that ef­fec­tive per­for­mance mon­i­tor­ing — a key own­er­ship func­tion of the state as owner — can drive both fi­nan­cial and non-fi­nan­cial im­prove­ments.

Board of di­rec­tors

Em­pha­sis­ing that it is crit­i­cal that PSBs’ board of di­rec­tors func­tion in­de­pen­dently, Ko­tak sug­gested that this in­de­pen­dence could be achieved via two routes: con­sti­tu­tion and com­po­si­tion of board of di­rec­tors of PSBs should be brought un­der the Bank­ing Reg­u­la­tion Act, in line with SEBI reg­u­la­tions, and the cur­rent struc­ture of own­er­ship ver­sus the hold­ing com­pany struc­ture should be eval­u­ated.

To at­tract in­de­pen­dent di­rec­tors, who can add value with their var­ied skill sets, to the board, the banker stressed that this will re­quire per­sua­sion at the high­est lev­els to at­tract tal­ent. Hav­ing an ex­pert on the board would bring in wider depth in think­ing and de­vel­op­ing strate­gies, thereby lead­ing to a more pro­fes­sion­ally-run bank.

Also, the board should be ad­e­quately com­pen­sated, in line with the mar­ket prac­tices. With this back­drop, steps must be taken to im­prove board com­po­si­tion by de­sign­ing a ro­bust pol­icy frame­work and clear pro­cesses for board nom­i­na­tions and ap­point­ments.

Ac­cord­ing to Ko­tak, the gov­ern­ment must cease is­su­ing any reg­u­la­tory in­struc­tions ap­pli­ca­ble only to PSBs, as dual reg­u­la­tion is dis­crim­i­na­tory.

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