Nayak Says All Banks Violate SEBI Listing Norms

All govt banks violate Sebi listing norms, says Nayak-Business Standard

The former Axis bank and Morgan Stanley India head says one of the main focus of the report was to level the playing field for public sector banks

Shyamal Majumdar & Manojit Saha  |  Mumbai  

May 15, 2014

Former Axis Bank chairman and Morgan Stanley India chief, P J Nayak, who headed the Reserve Bank of India (RBI) —appointed committee on governance requirement at banks, says one of the focus areas of his report is providing a level playing field to public-sector banks (PSBs), which are facing deep stress.

In a wide-ranging interaction with Business Standard — his first after giving the report that RBI made public on Wednesday — Nayak said, contrary to some misleading reports, the committee did not make any case for privatisation of PSBs. Rather, it focused on an urgent need to remove discriminatory external shackles, so that these banks could compete fairly with private peers. The shackles included the government’s failure in distancing itself from several governance functions and dual regulation by the RBI and the government.

For example, Nayak said, there were  almost no independent directors on the boards of government banks, despite the Securities and Exchange Board of India (Sebi) regulation for listed companies mandating that 50 per cent of directors must be independent. “This is wholesale violation of Sebi’s listing requirements. We have to bring everything under the Companies Act.”

Nayak said the Bank Nationalisation Act talked about eight different categories of boards of directors. Similarly, the SBI Act had seven different categories of directors. This, he said, was like splitting the board into tiny components and finding people for each component. The companies law, on the other hand, has three categories of directors — full-time directors, part-time directors and part-time non-independent directors.

Talking about the need to move to a uniform licence regime across banks, irrespective of ownership, Nayak said the report talked about many banks that defied ownership logic. Bank of Nainital, despite Bank of Baroda having a 99 per cent ownership stake in it, is classified as an old private-sector bank. ING Vysya Bank, in which ING (42 per cent stake) is the only foreign shareholder, is also an old private-sector bank. “There clearly are historical reasons for these specific forms of licensing but they appear illogical from an ownership standpoint.”

On the proposed Bank Investment Company (BIC), Nayak said it was like a passive alternative investment fund. All the government functions will have to be transferred to the BIC, whose only accountability would be to give adequate returns to the government on its investment in banks. “It should act like a private equity fund which manages the asset and ensures returns to investors,” Nayak said, adding the chief executive of BIC should be a professional banker or someone who has worked in the private equity sector. The return he delivers on the capital he manages is a major parameter by which his performance will be analysed.

“The choice for the government is obvious. I am sure it wants the banks it owns to be well governed, by giving it to a professional intermediate investment company,” he said.

Nayak said the committee identified many other areas where government banks did not have a level playing field. On the contentious proposal to reduce the government’s stake to below 50 per cent, he said it would actually be a good bargain for the government, which would still remain the owner of these banks.

For example, even with a 45 per cent stake, the government can exercise complete dominance at shareholder meetings. “All we are saying is that the government disadvantages the very banks in which it has invested in. What could be more ironical,” he asked.

Nayak said the government's ability to provide capital to its banks would have an impact on fiscal consolidation. “We have made some projections on how much Tier-I capital government banks would need till 2018. The most prudent projection suggests they will need Rs 5.87-lakh-crore capital infusion till that year according to the Basel-III norms”.

Nayak also said he had no idea whether the government would agree with the contents of the report. "I can only hope the RBI can use this document in its dialogue with the finance ministry." Giving examples of how governments encroached on the RBI's turf, Nayak said the instruction on uniform card rates for deposits were against the interest of depositors and also against the RBI policy of deregulated interest rates. If telecom or FMCG companies could compete on prices, there was no reason why banks could not compete as well, he said.

The first step, he said, was to empower public-sector banks' boards, which should choose the CEO. For example, DBS is the foremost bank in Singapore and its board selects the CEO, though the bank is owned by Temasek, which is a private equity fund owned by the Singapore government.

On private sector banks, Nayak said it was a good idea for an entrepreneur to be a CEO, provided the bank was governed by an adequately independent and professional board.

On allowing private bank promoters to retain 25 per cent stake, against the current limit of 15 per cent within 12 years, Nayak said promoters would have little incentive left if the maximum shareholding was set very low. In Indonesia, he said, a 25 per cent stake was defined as a controlling stake.

Link Business Standard

My Comment 

In my view Nayak panel has done nothing or suggested no such good idea which may help in the improvement of health of Public Sector banks. Panel has not fixed responsibility of erring officials and erring ministers. What they have suggested is nothing but old wine in new bottle. This is purely an attempt to hide the past mistakes of top bankers and regulators and set up a new governance committee, new board for selection of top management etc. 

It has now become clear to RBI and Government of India that they have damaged the fundamentals of public sector banks and time is ripe now for public revolt against regulators. One crystal clear point which emanates from panel report is that RBI and GOI failed to do their duty in last two decades and it is their sheer negligence which has resulted in current critical sickness of PS banks. They remained silent spectators when CEOs of banks were looting banks in the name of credit growth. They remained deaf and dumb when corrupt bankers were humiliating senior officers and workers of banks in the name of merit oriented policy for promotions, transfers and recruitment. They maintained complete silent when politicians were exploiting banks in the name of revival of economy. They were sleeping when legal set up for recovery failed to recover money from defaulters even after lapse of two or three decades.

I am of strong view that health of PS banks have gone from bad to worse during last two decades only due to bad Human resource policy and due to worst execution of good policies. If one peeps into performance and appraisal reports of all officers of last two decades , it will become crystal clear that good officers have always been neglected in all promotion processes and bad officers who were master in flattery and bribery got one after other elevation. And now gang of bad officers is ruling the banks with unity. They unitedly protect bad officers and sideline really good officers similar to case of Mr. Khemka in Harayana .

As long as workers of any organization do not feel satisfaction after doing devoted duty, there is no chance of bank improving their health whatsoever may be the finding and suggestions of Nayak Panel. It is only in PS banks that 20 year or 30 years experienced good officers are rejected and brand new officers in higher scale are recruited directly to please top bosses and politicians. Juniors are ruling seniors  not because they are more intelligent and talented ( barring some exceptions) but because they used money and powerful bosses for getting quicker promotions and got success in getting new job in higher scales.

It is this dirty game of top bankers that health of banks have deteriorated during last  two decades whereas private banks have improved their health under similar and fully same external situations like global recession or natural calamities, or interest rate freedom or recruitment freedom or government policies or legal set up etc.

Officers of PS banks work to please and protect the self interest of their bosses whereas officers in private banks work for betterment and for protection of their organization.

Anger of investors, bank customers, bank staff and that of all concerned against government is on rise due to relentless rise in stressed assets and due to government failure in containing the same and in recovery of bad loan from defaulters. Before it becomes violent, government as usual set up a panel for suggesting alternate ways and switch over the responsibility of failure to another set of body and get rid of punitive action for their past mistakes. And panel is also manned by such persons who can submit reports as per whims and fancies of the officials who are behind all stories of scams, frauds, bad debts and all types of irregularities.

It is the habit of Government; first they exploit the government organization and government fund for self interest and then change the name of the scheme and name of regulators or merge the maligned schemed to some other schemes. In the past many small banks , big banks , rural bank or cooperative banks or chit funds have failed and then merged with some stronger entity to avoid the consequences of public anger against mismanagement and large scale fraudulent activities perpetuated by the management of the failed bank.

As long as officials and the persons who hold the key post in any organization are bad and ill-motivated, no power on earth can stop misuse and pilferage of government money and no power can ensure good health of any public sector undertaking or any department. When top officials in banks are bad, assets created by them will definitely be bad and no power on earth can stop rise in bad assets of these banks. Nothing is to change if rules for constitution of bank’s board are altered or stake of government is diluted to below 50% in PS banks.

This is why they , corrupt bankers in nexus with corrupt team of politicians and regulating officials either write off the bad loans or keep bad loan evergreen by fresh lending or restructure bad loans or sell the bad loans to ARC to clean the balance sheet. All efforts are to conceal evil works and bad assets .This is a usual phenomenon in banks and in all government offices dealing with finance and money. When a bank become weak or goes beyond control, it is merged with some other stronger banks. 

It is the Habit of the government not to cure the root cause of the disease but to make lame excuses for failures or to put carpet on the malady or carry out little surgical operation to befool innocent masses.

And finally flattery and bribery culture is the root cause behind all mismanagement and all scam stories . Weak and ineffective judiciary adds fuel to fire.