MUMBAI: An active board seeking a say in bank regulation has thrown up questions about conflict of interest, given the presence of industrialists on the board of the Reserve Bank of India (RBI).
Traditionally, the RBI board had a strong presence of eminent industrialists like Ratan Tata, N R Narayana Murthy and Azim Premji. It has also included chiefs of highly indebted groups like K P Singh of DLF and G M Rao of the GMR Group. However, there was never any conflict of interest as the minutiae of bank regulation or monetary policy never came up to the board. That’s because, until now, the RBI board only gave a broad direction that the central bank should take.
But in the October 23 board meeting, some directors are understood to have turned vocal on a few RBI regulations. According to a senior former central banker, there would be conflict of interest if these businessmen had advance information of RBI’s regulations. He was reacting to reports that some directors wanted the RBI central board to play a more active role and deliberate on regulations. There is talk of the board wanting to push through five decisions, which includes issues such as regulatory forbearance and allowing weak banks to lend, in the forthcoming RBI board meet on November 19.
Sources close to the central bank also point out that, unlike boards constituted under The Companies Act, the RBI Act 1934 grants the governor with powers that are concurrent with the board. They refer to clause 3 of the hotly debated Section 7 of the RBI Act. While the first clause confers powers on the government to give directions to the RBI, the third part indicates that the governor shares power.
This clause 3 states, “Save as otherwise provided in regulations made by the central board, the governor and in his absence the deputy governor nominated by him in this behalf, shall also have powers of general superintendence and direction of the affairs and the business of the bank, and may exercise all powers and do all acts and things which may be exercised or done by the bank.” A source said, “The choice of the words ‘shall also have powers’ indicates that these are concurrent with the board.”
According to sources, the powers of the governor are reiterated in the Reserve Bank of India, General Regulations, 1949, which also addresses the issue of conflict of interest between board decisions and individual interests of directors. “You can imagine what would happen if an issue like the February 12 circular on recognition of non-performing assets came up to a board that included owners of highly indebted companies,” a source said.