Corporate Governance Response Paper

Bhumi Shah

1612064

TY BCom

RBI’s regulation on the Remuneration paid to the Private Bank’s

Chief Executive Officers and Managing directors.

Against the argument:

  Remuneration paid to private v/s a public sector bank.
The article states that the remuneration paid to private sector bank are highly regulated
by RBI and that they require its approval for the payment plan of its executives. As per
my understanding, although the regulations are applied to private sector,they still
manage to get a comparatively higher pay than their counterparts in the same industry.

Say for example, Arundhati Bhattarcharya of State bank of India had an annual package
of Rs. 31 lakh in the FY 2015 -16 whereas the remuneration package for Aditya Puri was
of Rs. 10.05 crore in 2016-17. (Nupur Anand, 2017)The former is paid around 0.03
percentages of the latter. With such huge salary gap it is pretty sure that the PSB’s in
India are going to face a talent crunch as all of the skilled employees would prefer
moving to private sector banks. So now with the cap system of the remuneration paid
inclusive of the variable component, the salary gap can be bridged and more of the
performance based salary payment would be done. And on the other hand when PSB’s
are also thinking of providing their employees with ESOP’s, the gap could further be
bridged and hence ensuring a parity of pay between these two sectors.

 An increment in control by RBI.

As mentioned in the article, there is an existing claw back clause in the remuneration
agreement that allows the RBI to negate certain portions of the remuneration package if
it feels that the person in question has violated certain governance norms. But now that
the Nomination and remuneration Committee of this public sector banks have to follow
the RBI regulation norms they would further take more care while passing a
remuneration package so that the chances of the same get rejected becomes minimal.
Hence the new guidelines provided by the RBI would provide a uniform structure for
all these private sector banks – ensuring transparency and ease in controlling.

Moreover with the increasing volatility of Indian markets and the piling up of the Non
Performing Assets at the Bank’s Balance sheets, such supervision may bring substantive
changes in the decisions taken by the CEO’s as their decisions are now directly linked
with their salary received, ensuring more accountability of the CEO’s than before.Also,
not just the CEO’s but with this regulation RBI is making accountable to various
independent and non executive directors too who are in charge of certain decisions that
are vital to the financial stability of the bank.
And with this move of going towards greater disclosures and transparency we are
moving towards the Anglo Saxon Model from the developing nations model from
where our governance model was actually influenced where we all we care about is the
proper disclosure and reporting by the bank. Although the shift is pretty gradual and it
is still long to encounter such changes. Yet the good thing is at least the shift has started.

 Role of the Nomination and Remuneration Committee

The article states that with the regulation in action, the job of the remuneration and
nomination committee would almost get nil. According to me this is not true. The
regulation is majorly focused of keeping the floor and ceiling of the variable pay and
including the stocks and options within the variable part. That does not mean that the
remuneration committee is not supposed to do its work of fixing the amount of
remuneration that it has to pay to its senior employees. And moreover the functions of
monitoring directors performances, carrying out their evaluation and others still
remains intact. The only change that now has been included is that now RBI regulation
would take care of the minimum and maximum cap of the variable pay. This change is
welcomed as far as my understanding of governance is concerned because with this the
efficiency of Board would increase as they are directly under the mandatory guidelines
of RBI which were absent earlier.

In a nutshell, with the implementation of new guidelines our banking system would be
complying with the regulations of the Financial Stability Board (FSB) (CNBC TV 18,
2019), further of it would lead to the alignment of Indian banks with that of the
international ones. Until now, the executives were generally concentrating on increasing
the short term profits and were taking certain aggressive risks to meet the same. It was
done as they were compensated very happily on meeting these goals. The long term
crises that could occur due o such aggressive risks were generally ignored. The growing
NPA’s are a result of such short term vision of the bank. Now that we have a ceiling
such risk taking would diminish. With now the supervision under direct the eyes of
RBI, the directors of the banks would be more thoughtful while implementing any
decision in the banks that have long term repercussions. In addition of all of these
benefits, the new norm puts the liability of difference between banks amount of bad
loan and regulator upon the bank heads. In case of any divergence, the bank heads may
have to lose their variable pay under the suspicion of malus. Again a double check
point on transparency and accountability is placed on the bankers by the RBI with this
norm. (Indian Express, 2019). And above all it is surely on the lines of paying the salary
on the basis of performance made –thus an effort of getting away with the bureaucracy
effects. Although certain precautions are required so that the regulation do not backfire
but the overall intention is definitely welcomed.