A discussion paper has been released by the Department of Regulation, Reserve Bank of India (RBI) for consultation and feedback. The objective of the paper is to align the corporate governance system of commercial banks in India with best available global best practices while factoring for the context of domestic financial system. The key points of the discussion paper have been briefly discussed as follows:

• The bank’s board shall have oversight over the code of conduct policy. The code of conduct would include issues such as disallowing illegal activities such as financial misreporting, misconduct, economic crime including fraud, money laundering, anti-competitive practices, bribery and corruption etc.


• The board shall ensure that proper policies and measures are implemented to identify conflict of interest. Thereafter, their impact on the organization should be assessed and decision on adequate mitigation measures to be adopted.


• Further, a director should abstain from voting where there is a conflict of interest or the director’s objectivity is affected. Adequate procedures should be adhered to ensure that all the transactions are taken on arm’s length basis.


• The Board, through its independent directors, at least once every year, should undertake a formal interaction with the senior management functionaries who are not directors on the board.


• The paper further stated that as part of overall governance framework, the board is responsible for overseeing a strong risk governance mechanism. A risk governance framework shall include three lines of defence. First, the business line; Second, a risk management function and a compliance function independent from the first line of defence and Third, an internal audit and vigilance function independent from the first and second lines of defence.


• The functions of the senior management should be well defined within the three lines of defence as mentioned above.


• The compliance function is responsible for ensuring that the bank operates with integrity in compliance with applicable laws and regulations.


• The vigilance functions shall broadly include (i) Preventive vigilance; (ii) Surveillance and detection; and (iii) Punitive vigilance. The bank shall formulate a vigil/whistle blower policy for directors, employees and third parties to report genuine concerns.


• To fulfill its responsibilities, the board shall define appropriate governance structures and practices for its own work, putting in place a proper system for its continuity and periodic review for its effectiveness.


• The paper also lays out various measures to ensure proper conduct of various committees of the board - the audit committee, nomination and remuneration committee, the stakeholder’s relationship committee and the risk management committee.


• All the mandatory committees of the Board as mentioned above shall meet at least six times a year and at least once every sixty days. All meetings of the board should have a majority of independent directors.


• The risk management committee of the board shall be responsible for setting the ‘risk appetite’ of the bank based on its ‘risk capacity’. Risk Appetite is the aggregate level and types of risk a bank is willing to assume to achieve its strategic objectives and business plan. It is decided in advance and within its risk capacity. Risk Capacity is the maximum amount of risk a bank can assume given its capital base, risk management and control capabilities as well as its regulatory constraints;


• Also, the risk management committee shall ensure a system where the committee members have the ability and willingness to effectively challenge business operations regarding all aspects of risk arising from the bank’s activities.


• Further, the board members shall be qualified and they should understand their oversight and governance role. They must be able to exercise sound and objective judgment about the affairs of the bank.


• All banks whether listed or otherwise, shall have a Company Secretary who is bound by the professional standards of a Company Secretary. The secretary shall report to the Chairman of the board. The performance assessment of the company secretary shall be undertaken by the Nomination and Remuneration Committee (NRC) based on the feedback provided by the Chairman of the board. The company secretary shall work closely with the compliance function of the bank.


• Compensation systems being a key component of governance structure, the board, through its NRC, is responsible for oversight of management’s implementation of compensation system for the entire bank.


• The total continuous tenure of a Non Executive Director (NED) on the board, including the tenure as a Chair shall not exceed eight years. Thereafter, if considered necessary and desirable by the board, the person could be considered for re-appointment in the same bank after a minimum gap of three years. All NEDs including the Chairman can be on the board of a bank till attaining 70 years of age.


• It must be ensured that the minutes of the meeting of the board as well as its committees are so recorded that it shall be possible to appreciate the quality of deliberations including individual directors view on the matter, independence of directors, critical decisions made, dissenting views expressed and discussed within the decision-making process.


• The paper also mentions various measures that bank should take care of when appointing a director to its board. The bank will need to ensure not to award any professional work to a person who was a director of the bank, for a period of two years after such person has vacated the director’s office.

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