Are you 'fit' enough to be a bank director?

The tussle between the two promoter families of YES Bank has brought to the fore the “fit and proper criteria” in the appointment of directors to bank boards.

Rana Kapoor, YES Bank’s largest shareholder and co-promoter, is locked in a legal battle with co-promoters and extended family members Madhu Kapur and her daughter Shagun Kapur Gogia. 

While the Kapurs allege they have been denied their rightful place in the board, Kapoor has been chanting the “fit and proper” mantra. Business Standard tries to understand what is fit and what isn’t.

The Reserve Bank of India (RBI)’s framework of eligibility criteria for private sector banks is based on the recommendations the Ganguly group report. In 2004, RBI issued a notification that laid down specific criteria to be fulfilled by persons being appointed to the boards of private sector banks.

The notification clearly put the onus of due diligence on banks. “Banks in the private sector should undertake a process of due diligence to determine the suitability of the person for appointment/continuing to hold appointment as a director on the board, based on qualification, expertise, track record, integrity and other ‘fit and proper’ criteria. Banks should obtain necessary information and declaration from the proposed/existing directors for the purpose in the format enclosed,” it said.

The declaration format provided by RBI requires a candidate to give details under four broad categories. The first section relates to personal details such as age, qualification and relevant experience.

The second requires the details of “relevant relationships of the director”. This could be relevant to what comes into play in the YES Bank issue. Under this head, the candidate is expected to give a list of relatives connected with the bank. 

The candidate also has to give details of companies/entities in which he/she is “interested in” or has “substantial interest”. Funds and other facilities availed by these entities should also be disclosed. Under the remaining two sections, the declaration also requires disclosures of “professional achievement” and “legal proceedings”.

RBI has further said the process of due diligence should be undertaken by private sector banks during the appointment/renewal of appointment. The boards of these banks should constitute nomination committees to scrutinise the declarations. Based on the information provided in the signed declaration, these committees should decide on the acceptance. 

When necessary, these may also make references to the appropriate authority/persons, to ensure compliance with the requirements indicated.

The 2004 notification also refers to the Ganguly group report, which says, “The candidate should normally be a graduate (which can be relaxed while selecting directors for the categories of farmers, depositors, artisans, etc). He/she should be between 35 and 65 years of age. He/she should not be a Member of Parliament/Member of Legislative Assembly/ Member of Legislative Council.”

The report also requires that the directors shouldn’t be owners or related to the owners of a non-banking financial company.

Assuming Shagun Kapur Gogia and her mother were not expressly disqualified in any of the above criteria, there is one last resort for Rana Kapoor. 

The Ganguly group report also provides certain directives on the composition of the board, which could have certain implications in the YES Bank case, experts say. The report says the composition of the board “should be commensurate with the business needs of the banks”, in the context of banking becoming more complex and competitive.

“There is an urgent need for making the boards of banks more contemporarily professional by inducting technical and specially qualified personnel.

Efforts should be aimed at bringing about a blend of ‘historical skills’ set, i.e. regulation-based representation of sectors such as agriculture, small-scale industries, cooperation, etc, and the ‘new skills’ set, i.e. need-based representation of skills such as marketing, technology and systems, risk management, strategic planning, treasury operations, credit recovery, etc.”

The Ganguly panel said, “The above suggestions may be kept in view while electing/co-opting directors to their boards.”

What are the skill sets of Madhu Kapur and Shagun Kapur Gogia? Did the YES Bank board already have people with these skill sets and, as a result, couldn’t have more?