It was in June 2020 that the Reserve Bank of India first proposed, in a discussion paper, that it would cap the tenure of chief executives of private banks. The RBI had suggested a maximum 15-year tenure for chief executives and 10 years for promoter CEOs, with a transition period of up to two years suggested to appoint a successor.
The final guidelines released on Monday follow along similar lines with some departures. While the maximum tenure of a private bank CEO has been capped at 15 years, for promoter CEOs, the RBI has prescribed a term of 12 years at most. Banks have been asked to be in compliance with the rules by October 2021. The RBI, however, has said existing CEOs can continue till the end of their current term.
The nuances of the final policy vis-a-vis the discussion paper will mean small relief for Kotak Mahindra Bank, which was seen to be the most impacted by the RBI’s new rules.
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Under the discussion paper’s prescribed rules, and on the assumption that the rules are applicable from April 1, 2021, Uday Kotak would have had two years till April 2023 to appoint a successor, Macquarie Research had said in a report dated June 11, 2020.
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According to the final circular, Kotak will be allowed to continue till the end of his current tenure. His tenure was renewed for three years starting Jan. 1, 2021, which allows him some additional time until January 2024 to appoint a new successor.
The broader of the RBI’s guidelines is to improve governance at bank boards by separating ownership and management. The new rules also prescribe that the chair of a bank board be an independent director. In addition, non-executive directors have been asked to head the audit, risk management and the nomination and remuneration committees.
“The RBI has come out with quite delayed but very important guidelines on improving the governance framework in banks. It is very important to ensure that ownership and executive management at private banks are truly separated for better quality banks,” said independent analyst Hemindra Hazari. “It is also sad that the regulator gave an unnecessary extension to Uday Kotak before these guidelines were announced, allowing him a longer tenure at Kotak Mahindra Bank.”