A Discussion Paper on ‘Governance in Commercial Banks in India’ was issued by the Reserve Bank on June 11, 2020, to review the framework for governance in commercial banks. Based on the feedback received, a comprehensive review of the framework has been done, and a Master Direction on Governance will be issued in due course.
In order to address a few operative aspects received through such feedback, it has been decided to issue instructions with regard to the Chair and meetings of the board, the composition of certain committees of the board, age, tenure and remuneration of directors, and appointment of the whole-time directors (WTDs).
The revised instructions would be applicable to all the Private Sector Banks including Small Finance Banks (SFBs) and wholly owned subsidiaries of Foreign Banks.
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.
The circular will not be applicable in the case of foreign banks operating as branches in India. The applicability to other commercial banks viz., Local Area Banks, Payments Banks, and Regional Rural Banks will be notified separately.
Banks will have to be compliant with these guidelines by 1.10.2021. RBI shall review the level of progress and adherence to the dilution of the promoter’s shareholding in the bank.
Salient features of new Governance norms
- To be complied with by October 1, 2021
- Tenure of Managing Director (MD) and Chief Executive Officer (CEO’s) of private banks capped at 15 years
- RBI may give an extension of 3 years under extraordinary circumstances.
- MD/CEO/WTD’s shall be eligible for reappointment in the same bank after a gap of three years.
- Professional MDs and CEOs can continue as such for 15 years and get reappointed after a gap of three years
- During the cooling period of three years, such persons shall not be associated with the bank or its group companies/entities in any capacity, directly or indirectly.
- Nomination and Remuneration Committee (NRC) and Audit Committee of Board (ACB) to comprise of only directors who are non-executive directors (NEDs)
- Chairman of the board to be a non-executive director but can not be a part of Audit Committee of Board (ACB)
- ACB shall meet at least once in a quarter
- At least 50% of the board members attending board meetings should be independent directors (IDs) i.e., 50% to be considered for board attendance, not the composition of the board
- Independent directors can continue till the age limit of 75 years
- In private sector banks, no person can continue as MD/CEO/WTD beyond the age of 70 years. Within the overall age limit of 70 years, based on internal policy, bank boards will be free to prescribe a lower retirement age.
- Independent directors can continue in the position of ID for a maximum period of eight years, whether continuously or otherwise. However, they will be eligible for reappointment after a cooling period of three years.
- The maximum age limit for MD /CEO/WTD shall be 70 years but the board can fix a lower age limit if it decides so.
- Existing Chairman, MD, CEO, or WTD can continue as such for which approvals have already been granted.
- ACB meetings shall be chaired by an independent director who shall not be chairman of any other committee of the board.
- ACB Chairman shall not be a member of any board committee which has a mandate for sanctioning of credit exposures.
- All ACB members shall be able to understand all financial statements as well as notes/reports attached with such statements. At least one member of ACB shall possess professional expertise/qualification of financial accounting or financial management (for example, application of accounting standards and practices, internal controls, etc)
- In the case of RMCB, it shall be constituted with a majority of NEDs, and attendance at meetings shall be at least with 50% independent directors with one member having professional expertise or qualification in risk management. The chair of RMCB shall be an independent director.
- Maximum remuneration of NEDs other than the Chairman shall not exceed Rs. 20 lakhs per annum
- Remuneration to NED’s may be in the form of fixed remuneration commensurate with individual director’s responsibilities and demands on time such that it is able to attract qualified and competent individuals.
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 of three directors, whichever is higher. At least half of the directors attending the meetings of the board shall be independent directors.
Committees of the Board
(a) Audit Committee of the Board (ACB)
4. The 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 directors1. The ACB shall meet at least once a quarter. The meetings of the ACB shall be chaired by an independent director who shall not chair any other committee of the Board. The Chair of the ACB shall not be a member of any committee of the board which has a mandate of sanctioning credit exposures. All members should have the ability to understand all financial statements, as well as the notes/ reports attached thereto, and at least one member shall have requisite professional expertise/ qualification in financial accounting or financial management [e.g., experience in the application of accounting standards and practices, including internal controls around it].
(b) Risk Management Committee of the Board (RMCB)
5. The board shall constitute an RMCB 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 management2. Meetings of RMCB shall be chaired by an independent director who shall not be a Chair of the board or any other committee of the board. The Chair of the board may be a member of the RMCB only if he/she has the requisite risk management expertise. The RMCB shall meet at least once in each quarter.
(c) Nomination and Remuneration Committee (NRC)
6. The board shall constitute an NRC made up of only NEDs. The NRC shall meet with a quorum of three members. 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. The meetings of the NRC shall be chaired by an independent director. The Chair of the Board shall not chair the NRC. The meeting of NRC may be held as and when required3.
Age and tenure of NEDs
The upper age limit for NEDs, 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 total tenure of a NED, continuously or otherwise, on the board of a bank, shall not exceed eight years. After completing eight years on the board of a bank the person may be considered for re-appointment only after a minimum gap of three years.5 This will not preclude him/her from being appointed as a director in another bank subject to meeting the requirements.
Remuneration of NEDs
In addition to sitting fees and expenses related to attending meetings of the board and its committees as per extant statutory norms/ practices, the bank may provide for payment of compensation to NEDs in the form of a fixed remuneration commensurate with an individual director’s responsibilities and demands on time and which are considered sufficient to attract qualified competent individuals. However, such fixed remuneration for a NED, other than the Chair of the board, shall not exceed ₹20 lakh per annum.
Tenure of MD & CEO and WTDs
Subject to the statutory approvals required from time to time, the post of the MD&CEO or WTD cannot be held by the same incumbent for more than 15 years. 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. 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 clarified that the extant instructions on the upper age limit for MD&CEO and WTDs in the private sector banks would continue and no person can continue as MD&CEO or WTD beyond the age of 70 years. Within the overall limit of 70 years, as part of their internal policy, individual bank Boards are free to prescribe a lower retirement age for the WTDs, including the MD&CEO.
MD&CEO or WTD who is also a promoter/ major shareholder, cannot hold these posts for more than 12 years. However, in extraordinary circumstances, at the sole discretion of the Reserve Bank such MD&CEO or WTDs 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.