RBI tightly regulates commercial banks and mandates their listing to improve transparency. But while it prioritises depositors’ interests over those of investors, what about safeguarding the latter’s interests?
The economy’s financial stability depends on the smooth functioning of banks, which RBI is tasked with ensuring. It has nominee directors on the boards of PSBs and, often, on other banks’ boards. Some argue that, as the lender of last resort, RBI must be closely involved in banks’ operations. It also relies on banks for its commercial activities and market operations. In this backdrop, it is difficult to perceive that RBI operates at arm’s length from the entities it regulates. This could be problematic. Among other concerns, close involvement may create a perception that the regulator is lenient in granting forbearance to banks.
Asymmetry
Listed banks face less rigorous disclosure requirements than other entities listed on stock exchanges. RBI frequently issues banks directions and often keeps these, along with its inspection findings, confidential. Only RBI officials and the banks concerned know the details. Some directions and deficiencies identified during inspections may have financial implications.
These concerns manifest themselves in 3 areas: inadequate disclosure, lack of transparency in bank resolution and weak governance of PSBs.
Not enough public disclosure: Despite listing requirements, banks often fail to disclose information to the market promptly. When problems eventually come to light, markets react sharply, catching investors off guard.
Banks argue that sensitivities prevent timely disclosure and that they need RBI’s prior permission to share such information. The extent to which they can withhold information warrants scrutiny by the market regulator in consultation with RBI.
Under cover: RBI’s process for restructuring, reconstructing or amalgamating banks lacks transparency. Under Banking Regulation Act, 1949, RBI can unilaterally frame a scheme to reconstruct a bank or compulsorily amalgamate it with another banking entity if it finds the bank critically mismanaged or financially insolvent. Such action does not require the prior consent of the bank’s shareholders, members or creditors.
Get rid of rigidity
A case in point is Yes Bank‘s 2020 bailout, under which ₹8,415 cr of AT1 bonds held by investors were permanently written down, wiping out their investments. Bondholders challenged the move and won in the Bombay High Court. RBI, GoI and Yes Bank appealed against the ruling, but Supreme Court dismissed their appeals, upholding the bondholders’ case.
More importantly, should a regulator also act as the resolution authority for entities it regulates? Concerned that an entity’s failure might reflect poorly on its supervisory record, the regulator may give a distressed entity too much leeway to recover. Bank insolvency resolution requires a specialised statutory authority operating under a transparent, well-defined procedure. Notably, Insolvency and Bankruptcy Code, 2016 does not cover financial firms, including banks.
GoI introduced a bill in 2017 to set up a resolution corporation to handle financial firm failures. But it was withdrawn in 2018 following concerns over some contentious provisions. It must redraft the legislation and introduce it in Parliament soon.
PSB governance: Public sector banks (PSBs) are regulated by both RBI and GoI, an arrangement that the apex bank has previously questioned. Governance of PSBs leaves much to be desired. For instance, GoI appoints all directors to PSB boards, both executive and independent. It also determines staff salaries and incentive schemes, including those for EDs and key managerial personnel, across all PSBs, with broadly similar structures. Such an arrangement would be unthinkable in a private sector commercial entity.
In private sector banks, Companies Act and Sebi regulations entrust this responsibility to the Nomination and Remuneration Committee (NRC), a key board committee. What, then, is the role of NRCs in PSBs?
Listed PSBs routinely seek exemptions from Sebi’s Listing Obligations and Disclosure Requirements (LODR), often citing government ownership as grounds for differential treatment. These include exemptions from minimum public shareholding requirements and the mandated number of independent directors on their boards.
These requirements are the bedrock of listing regulations. Diluting them compromises investor interests, distorts the playing field between public and private sector entities, and undermines market discipline.
Then there are PSBs that are not incorporated as companies under Companies Act but are established under specific statutes. The Acts governing these banks were enacted decades ago, and many of their provisions are not in line with LODR requirements, which Sebi has amended from time to time to reflect market developments.
These Acts should be repealed, and the banks incorporated under Companies Act, bringing them under the same regulatory requirements as other listed entities.
The writer is former chairman, SEBI
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
