The Reserve Bank of India has capped tenure of managing directors, chief executive officers and whole-time directors of private lenders and small finance banks at 15 years from the date of first appointment. For chief executives who are part of the promoter group or large shareholders, the tenure will be capped at 12 years.
The changes are part of a wider set of rules intended to strengthen governance at private sector banks and follow a series of accidents over the past few years. As part of these rules the RBI has made changes to the manner in which bank boards function.
As per the new rules, CEOs, managing directors or whole-time directors of private banks who have completed 15-year would be eligible to be reappointed in the same bank only after a cooling off period of three years. “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,” the regulator said in a circular on Monday.
In case of MDs & CEOs or whole-time directors who are also promoters or major shareholders of the bank, the regulator has capped the tenure at a maximum of 12 years. Their tenure, however, may be extended to 15 years at the sole discretion of the RBI.
The upper age limit for MDs & CEOs and whole-time directors would continue to remain 70 years, the RBI said. Within that limit, as part of their internal policy, individual bank boards are free to prescribe a lower retirement age for whole-time directors, including the MD & CEO.
The proposals by the RBI were suggested in June 2020 and divided views across the industry.
“The guidelines are very important with respect to governance in private banks. Earlier, the RBI had an ad hoc approach to CEO appointments at banks. Since 2017, we have had a few instances of bank CEOs seeing their tenures cut short by the RBI, which caused some confusion as far as management is concerned,” said Ashvin Parekh, managing partner at Ashvin Parekh Advisory Services. “Having a clear framework helps banks plan succession better. It is also more preferable for institutions to have a clear pathway, when looking at CEO appointments.”
Amit Tandon, MD of IiAS disagreed.
“When the RBI sought feedback on the draft guidelines last year we had made a point that the topic of governance reforms cannot be based on narratives in the market and would need to be backed by data. For every bad example of governance in private banks today, one can raise a good example as well,” said Tandon. “There is no proof that a 15 year tenure for a bank CEO is better for governance than an 18 year or 22 year tenure. Apart from listing these norms, the regulator needs to also boost its supervisory function, if it intends to curb governance problems.”