Uday Kotak’s 17-year term at the helm of Kotak Mahindra Bank may soon end, if certain proposals by the Reserve Bank of India become the norm. Last night, the RBI had released a discussion paper on governance at commercial banks.

For Chief Executive Officers (CEOs) who are promoters or large shareholders, it has been proposed to cap the tenure at 10 years. For non-promoters, the CEO tenure has been proposed to be capped at 15 years, with eligibility for re-appointment after 3 years. The same rules are proposed to be applicable for Whole Time Directors (WTD) of banks.

“It is felt that 10 years is an adequate time limit for a promoter / major shareholder of a bank as WTD or CEO of the bank to stabilise its operations and to transition the managerial leadership to a professional management,” RBI said.

Kotak Mahindra Bank may be affected sooner than its peers if these norms are finalised.

“Uday Kotak (Promoter CEO) has completed a tenure of over 17 years at Kotak Bank, with the current tenure coming up for renewal in December 2020. This could imply a potential CEO change at Kotak Bank in about 2-3 years based on the above discussion paper,” Morgan Stanley said in a note.

Jefferies also noted, “if the norms are implemented as is (and notified by Sep 20) then his term may expire on Sep 2022 or April 2023. Mr. Dipak Gupta (currently Joint MD) could be a prospective internal successor.”

“This is a good move,” former RBI Deputy Governor HR Khan told CNBC-TV18. “Let's see the final version, I don’t think it will come in a hurry. RBI has invited comments. Importantly this applies to both private and public sector banks,” Khan noted.

The other promoter CEO who could be impacted is AU Small Finance Bank's Sanjay Agarwal. If the regulator considers its CEO Sanjay Agarwal’s tenure before it became a small finance bank in 2017, then even AU SFB would have to undergo a CEO transition soon. However, if his tenure is counted only after receiving the small finance bank licence in April 2017, then he may have another 7 years to comply.

RBL Bank and Federal Bank may be impacted in 5 years, and Bandhan Bank only after 10 years.

Among non-promoter CEOs, “larger private banks aren't immediately affected and PSU banks tend to see frequent CEO changes anyway,” Jefferies noted.

HR Khan pointed out, that for public sector banks, RBI must set a floor for bank CEO tenures, which is by the CEOs as well industry watchers, as too short to implement meaningful reforms.

“In the overall interest of good governance, a management functionary who is not a promoter / major shareholder can be a WTD or CEO of a bank for 15 consecutive years,” RBI’s discussion paper said. Thereafter, the individual will be eligible for re-appointment as WTD or CEO only after the expiration of three years. This is also on the condition that the person is not associated with the bank in any manner during the 3 year period.

Reserve Bank believes that ten years is an adequate time limit for a CEO to stabilise the bank’s operations, and to transition the managerial leadership to a professional management. According to the RBI, capping the tenure of bank CEOs will help separate ownership from management, and reinforce a culture of professional management.

Source: Jefferies, Morgan Stanley

First Published:Jun 12, 2020 11:15 AM IST