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Reserve Bank of India (RBI) New Directive: Two Whole Time Directors Required on Bank Boards for Governance

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The RBI has issued a notification instructing private sector banks and wholly-owned subsidiaries of foreign banks to ensure the presence of at least two Whole Time Directors (WTDs) on their Boards. This includes the Managing Director and Chief Executive Officer (MD & CEO). The exact number of WTDs should be determined by the bank’s Board, considering factors such as the scale of operations and business complexity. The RBI has introduced this requirement to address the increasing complexity of the banking sector and to establish effective senior management teams capable of managing ongoing and emerging challenges.

According to the RBI circular, banks that currently do not meet this minimum requirement should submit their proposals for the appointment of WTD(s) within four months, as per Section 35B(1)(b) of the Banking Regulation Act, 1949. Banks that do not have the necessary provisions for appointing WTDs in their Articles of Association should seek approvals under Section 35B(1)(a) as quickly as possible to comply with these instructions.

In a previous notification dated April 26, 2021, the RBI had issued instructions on Corporate Governance in Banks. It stated that MD & CEOs or WTDs who are also promoters or major shareholders could not hold these positions for more than 12 years, or not more than 15 years under extraordinary circumstances at the discretion of the RBI. Re-appointment of such MD & CEOs or WTDs within the 12/15 years period would also consider the progress and adherence to milestones for diluting promoters’ shareholding in the bank, as per the RBI discretion.

The RBI notification is enclosed. Readers are encouraged to review past cases where the re-appointment of MD & CEOs has become a contentious issue between banks and the RBI, as well as cases where the RBI has not approved the appointment or re-appointment of MD & CEOs and WTDs including the delays in approval that has led to other challenges in governance.

Readers are welcome to share their views with Regstreet Law Advisors at info@regstreetlaw.com

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