By Anjan Roy
The union cabinet has cleared a long pending change in banking regulation which can have deep impact on how banks are run in the country. The amendment bill raises the voting right of bank shareholders. A bill making the necessary changes in the banking act will be presented in parliament during the current session.
For public sector banks this has been raised from 1% at present to 10% under the amended laws and for private banks this has been increased from 10% to 26%. Even though this is a major improvement, it falls short of what should have been done or what is available for shareholders in other than banking companies. Elsewhere, a shareholder has one vote for one share, though not in the case of banks.
Thus shareholders’ democracy is only limited for investors in banks in India. Such restriction delimits the voice of the shareholders in the management of banks. Thus, the bank managements can do whatever they liked. But since banks, at least the bigger banks, were all nationalised and owned by the government, including the appointment of their top management and bank boards, it was the government’s fiat that ran the banks. This was a natural corollary of bank nationalisation, when the major Indian banks were nationalised by the government.
Limiting shareholders vice in the management of banks in India is therefore a legacy from nationalisation days. It was only partially lifted since some banks were still left with small individual shareholding even after nationalisation. Primarily it was the State Bank of India, India’s by far the largest bank, which had some small private shareholding which were not taken over at the time of nationalisation. These shareholders of SBI were mainly employees of the bank. A result was that their small shareholding became immensely valuable: at one point of time One SBI share of Rs10 face value was valued at over Rs10,000 and at times it was sold at even Rs15,000. At any rate, these small shareholders, holding only a handful of shares, did not want much say in the running of the bank.
It was only subsequently when banks were allowed to make public offers and their shares could be held widely by the retail investors that the issue of voting rights became critically important. In the case of new private sector banks, investors were much more strident in their demand for shareholders voice as in some cases there were demands for change in management. Banks in the private sector were changing hands and groups of shareholders had clashed with the existing board of directors. However absence of one-share-one vote principle in banks thwarted many of these moves.
Nevertheless, the private sector banks in India even today are the bit players in the overall banking scene. The major chunk of India banking is with the public sector banks which dominate no less than 70% of banking business. For these banks, there are other regulations limiting shareholder activism or potential threat to bank managements.
There are two basic rules. Firstly, even when bank shareholding was thrown open and were listed on the stock exchanges, the government still has to own 51% of paid-up share capital. Effectively, this is however much higher and thus the controlling voice, even by shareholders’ right, is that of the union government. Secondly, the Reserve Bank rules prescribe that no individual shareholder can own more than more than 5% of the paid-up share capital of a bank, unless this is permitted by the RBI. Combing these two, it means that the government nominates all directors on bank boards and continues to control the functioning of the banks.
This stranglehold has spawned lot of misuses. The banking division of union finance ministry, which is the administrative body for public sector banks, considers these banks as their fief. Thus, the chairman and managing director of a bank, whose business now runs into thousands of crores of money, can often be found seating at the visitors’ room at the ministry. The banks keep at the disposal of these bureaucrats innumerable small facilities. Successive governments have used the bank directorships as political patronage for party loyalists. Departing governments would put their nominees for five years on bank boards.
These are of course small coin compared with the policy implications of throwing open shareholders rights in banks. Shareholders, or groups of them, having larger shareholding and voting rights in banks can now demand a position in the boards of banks. They can also object to certain policy directions that are hurting shareholder interest. Directed lending therefore might be objected to by shareholder groups. What happens to these policy directions of government?
Some of the recent cases are instructive. Consider the threat of law suits against Coal India Ltd by one of the overseas investors, The Children’s Trust, alleging mismanagement in CIL and opposing some of the decisions of the company. Now that foreign financial institutions are major investors in the stock of banks and other companies, their voice or views would be important. They might drag companies into international arbitration. Consider the possibility that government announces a loan waiver plan and investors oppose it.
Giving voice to shareholder activism will mean changing the corporate governance practices and norms of banks. It will be important to be more responsive to the demands of shareholders than only listening to the babus in the finance ministry. Banks will now have two bosses, first the shareholder and then the government as represented by the bureaucrats. At the least, the managements will have the option to play one against the other. (IPA Service)