Context:
The forex liability accounting fiasco at IndusInd Bank has attracted widespread media attention, particularly concerning the reappointment of its managing director (MD) for a one-year term, rather than the requested three years. This decision mirrors a similar situation from the previous year, raising questions about the rationale behind such truncated approvals.
Recent Issues with MD Appointments
- The reappointment of the MD at IndusInd Bank follows a trend of curtailed tenure approvals. The rationale behind approving an individual for a shortened term, despite previous concerns, remains unclear.
- A similar incident occurred in 2023 at Kotak Mahindra Bank, where an interim MD appointment was approved for just two months, despite the initial request for a four-month term.
- Financial regulators, such as Sebi and Irdai, also follow practices of approving MD appointments in piecemeal terms, often resulting in entities operating without an MD for extended periods, sometimes up to six months.
Regulatory Involvement in Appointments
- Financial regulators have increasingly asserted their control over MD appointments and reappointments, rejecting candidate panels and altering remuneration structures.
- Private sector entities are governed by their boards but face significant regulatory oversight in key appointments, including the CEO, executive directors, and independent directors.
- Regulators also participate in selecting CMDs and whole-time directors for public sector banks and insurance companies, sometimes appointing their nominees to boards.
The Issue of Regulatory Overreach
- Excessive regulatory involvement in the appointment process has led to unintended consequences:
- Uncertainty over leadership impacts business plans.
- The regulatory approval process delays appointments and undermines accountability for governance lapses.
- This involvement risks creating moral hazards, where entities rely too heavily on regulators to manage their governance processes.
Public vs Private Sector Dynamics
- Public sector entities face an additional challenge in leadership appointments, as 42% of director positions on public sector bank boards are vacant, primarily due to delays in the Appointments Committee of the Cabinet, headed by the Prime Minister.
- In contrast, private sector boards can act independently, but their appointments are subject to scrutiny by regulatory bodies, creating a perception of non-neutrality based on ownership type.
Consequences of Expanded Oversight
- Uncertainty in leadership can disrupt the operations of regulated entities, impacting business plans and shareholder confidence.
- A talent drain is emerging, with skilled professionals increasingly unwilling to join boards or leadership positions in heavily regulated entities.
- Listed entities are particularly sensitive to leadership uncertainties, which can adversely affect their market performance.
The Need for a Balanced Approach
- Regulatory oversight should act as a safeguard, not a substitute for internal governance.
- Accountability should rest with the boards and management of these entities, with strict penalties for governance failures.
- Deregulation in the financial sector should empower entities to act as responsible adults, allowing them to make decisions without excessive regulatory interference.
The current approach to regulatory involvement
