Mumbai, Jan 20: The Reserve Bank of India today formed an eight-member committee headed by P.J. Nayak to review regulatory guidelines on bank ownership and board representation, fit and proper criteria for the appointment of directors and compensation guidelines for board appointments.
Nayak is the former chairman and CEO of Axis Bank.
The committee will also review the regulatory compliance requirements of bank boards in India and “judge what can be rationalised and where requirements need to be enhanced”, the RBI said in a press release.
It will also examine the working of bank boards and set down ways to determine whether they are devoting adequate time to discuss issues of strategy, growth, governance and risk management.
One of the terms of reference is to investigate possible conflicts of interest in board representation, including among owner representatives and regulators. It will also review the “fit and proper” criteria for all categories of directors of banks, including tenor of directorship. The committee is expected to submit its report within three months from the date of its first meeting.
The committee also includes S. Raman, whole-time member of Sebi; Shubhalakshmi Panse, chairperson and managing director of Allahabad Bank; Pratip Kar, former executive director of Sebi; Joydeep Sengupta, director at McKinsey & Company; Harsh Vardhan, partner, Bain & Company India Pvt Ltd; Somasekhar Sundaresan, partner at J. Sagar Associates; and Krishnamurthy Subramanian, assistant professor at the Indian School of Business.
Over the years, the RBI has tweaked some of these guidelines. The committee will take a comprehensive view of the changes that have been made in the intervening years.
For instance, the Banking Law Amendment Act 2012 had made it mandatory for a person to seek prior approval from the RBI before acquiring 5 per cent or more in the share capital of a banking company. The rule was introduced in line with international best practices and to ensure that control of banking companies were in the hands of “fit and proper persons”.
The act came into force from January 18 last year.
The act also gave the RBI the powers to supersede the board of directors of a banking company subject to a total period of 12 months and appoint an administrator till alternative arrangements were made. It also conferred powers on the Reserve Bank to raise the ceiling on voting rights from 10 per cent to 26 per cent in a phased manner.
In January 2012, the RBI had come out with guidelines for compensation to whole-time directors and CEOs of banks in line with principles enunciated by the financial stability board. The guidelines came into effect in 2012-13.
The guidelines had stipulated that while designing compensation arrangements, private and foreign banks must ensure that there was a proper balance between fixed pay and variable pay. However, variable pay should not exceed 70 per cent of the fixed pay in a year. Within this ceiling, at higher levels of responsibility the proportion of variable pay should be higher, it added. The variable pay could be in cash, or stock-linked instruments or a mix of both.
The existing compensation guidelines also state that where the variable pay constitutes a substantial portion of the fixed pay, say 50 per cent or more, an appropriate portion of the variable pay, say 40 per cent to 60 per cent must be deferred for over a period. The bank may define what is “substantial” in its compensation policy.
In the event of negative contributions of the bank and/or the relevant line of business in any year, the deferred compensation should be subjected to malus/clawback arrangements.
A malus arrangement permits the bank to prevent vesting of all or part of the amount of a deferred remuneration. The Malus arrangement does not reverse vesting after it has already occurred.
A clawback, on the other hand, is a contractual agreement between the employee and the bank in which the employee agrees to return previously paid or vested remuneration to the bank under certain circumstances.