ACCORDING TO the financial press, the government prevailed upon Harcharan Singh Josh, a political appointee, who was an independent director on the board of Punjab & Sind Bank, a public sector bank, to resign, after a prolonged process. A review of his credentials convinced the powers that be that he should not be on the bank’s board any longer. 

 

With this ‘independent’ director out of the way the bank has reportedly resumed its board meetings. The bank’s Chairman, R P Singh, had put on hold the meetings of the bank’s board, pending reconstitution of the board. He told the Union Finance Minister as much. Singh, an IAS officer, is on deputation to the bank. In May last, he called attention to alleged interference in the recovery of bad loans by independent directors who were political appointees. Defaulters and these directors colluded to negotiate settlement of NPA accounts for paltry sums, according to allegations. The bank’s 11-member board is comprised of five independent directors. 

 

Well done, Singh! IAS officers of your calibre are hard to come by these days! Incidentally, Basel II norms require that most banks set aside more capital for their present level of business. 

 

According to the banking sources quoted by the press, most of the 37 independent directors, inducted over the last two years in public sector banks are from the Congress party. All appointments are vetted by the administrative ministry before the Appointments Committee of the Cabinet (ACC) approves them. The banking division wrote to ACC drawing attention to the fact that some of the directors had furnished wrong information as to their educational qualifications. Let us not forget at the same time that SEBI regulations require that 50 per cent of the board of directors be comprised of independent directors. But vested interests always find a way to circumvent the regulations, whether they are framed by RBI or SEBI, as the P&S Bank incident reveals. 

 

The Reserve Bank of India's (RBI's) draft guidelines on ownership and corporate governance in private banks says that no promoter can hold more than a 10 per cent stake in a bank and no private and foreign bank can hold more than 5 per cent. The widely diversified holding pattern is expected to ensure corporate governance, while the proposal to raise the net worth of all private banks to Rs 300 crore is designed to lend stability to the system. But what have the guidelines achieved? 

 

Irrespective of their actual holdings, the promoters of private sector banks can run the show and influence every decision — be it investing crores of rupees or recruiting the bank’s watch and ward staff. The case of an old private sector bank set up before independence testifies to this fact. 

 

Not long ago, the bank was in the red with accumulated losses of over Rs 150 crores and a capital adequacy ratio of less than one per cent against the RBI-stipulated 9 per cent. It is no longer in the red, of course. The bank’s performance has improved on every front. Gross non-performing assets (NPA) were ostensibly 30 per cent (the actual figure was easily in excess of 45 per cent) then. Today, that figure is much, much lower; the net NPA is around two per cent. With over 4,000 plus employees and around 400 branches, the bank has been apparently nursed back to health. It is today a Rs 10,000-crore plus bank (the sum of its deposits and advances).  How did this happen?

 

The promoter who officially holds a stake of less than 50 per cent (even today) has apparently nursed it back to health. By virtue of being the promoter, he also was the Chairman of the bank until the RBI intervened and asked him to step down. The promoter let out his own flat in Mumbai to a senior executive of the bank for a sum that was way above market rates. The bank executive had to look for another flat after the RBI again intervened. But the RBI could not stop the promoter from selling his group company’s property to the bank at around Rs 6 crore, way above the market price. The bank bought the Mumbai property to open a branch. The title to the property was defective and the deal was not registered although one does not know the status now.  The bank’s zonal office and corporate office functioned from the premises of the promoter’s other companies. The promoter’s relatives also owned the two transit-houses that the bank had rented in Mumbai.

 

The promoter, owner of a group of manufacturing units, ran the bank the same way he ran his units. A bank, unlike a manufacturing unit, has to be run in a manner, which is consistent with the interests of its depositors. In general, the money the depositors pump into the bank is way ahead of the money that the promoter pumps in by way of capital. To tighten his grip on the bank, the promoter established the bank’s corporate office in Mumbai, although it was headquartered outside Maharashtra. Thanks to this move, all the departments that mattered, viz, the departments of credit, investment, treasury, recovery as also the board secretariat, the office of the managing director as well as deputy managing director and executive director were right behind the administrative offices of the promoter’s non-bank businesses, in all senses of the word. This helped the promoter to closely watch every single corporate decision the bank took. He would meet with the senior management every day although he was a non-executive Chairman!

 

The promoter had a say in promotion, transfer and recruitment of staff. The businessman that he was, he recruited relatives of senior officers employed with RBI, the income tax department and the registrar of companies. This helped him in running his non-bank businesses also, smoothly. The promoter’s father-in-law, cousin and family friends were amongst the independent directors of the bank. There were two nominee directors from the RBI, both retired central bankers and apparently not concerned with what was happening around them. Since the bank did not have a managing director then (it has, now), a committee of directors (comprised of the Chairman and some board members) met every week to oversee loan sanctions by and other operations of, the bank. The directors collected Rs 5,000 per sitting as sitting fee. 

 

This has been the promoter’s role in some private sector banks for sometime. Even as the promoter apparently did not violate the rules, he succeeded in running the bank like his personal venture to achieve gains on all fronts. This can hardly be termed corporate governance.

 

According to RBI or SEBI, no promoter can run a bank or any business for that matter arbitrarily because it is run by a board of directors. This view owes it to the fact that the board is comprised of independent directors. But how ‘independent’ these directors representing the various interest groups (like the small-scale sector, the agricultural sector and so on) can be if they are related to the promoter? A centralised decision-making process can make a mockery of professionalism in a bank or any business.  If a body corporate can go this far in spite of the so-called fool-proof systems and procedures in place and the eagle eye of the central bank of the country centred on it, one shudders to think of the permutations and combinations of alternatives available to companies headed by smart operators, to get around the law.  

 

In India, the Confederation of Indian Industry (CII) pioneered the concept of corporate governance. Corporate India has started recognising the pivotal role that disclosures play in creating corporate value in the increasingly market-oriented environment. The Securities & Exchange Board of India (SEBI) subsequently constituted its own code, which is mandatory for all listed companies. “No regulatory framework, however stringent, would be able to tame rogue corporates” – so goes a popular adage in investor circles.  In India too, the collapse of the UTI was the mother of all betrayals of the small investors, particularly because in its management both the government of India and Reserve Bank of India (RBI) were involved. Viewed in this context, one can begin to appreciate the difference between form and substance.