RBI proposes to strengthen governance in Banks

| Collates recommendatory and mandatory governance norms in single paper

Shaifali Sharma | Vinod Kothari and Company

The banking industry in India witnessed governance failures in the past which seems to have
triggered the need for the regulator to re-look at thegovernance guidelines for commercial banks
in India. RBI has rolled out a discussion paper1 on governance of commercial banks (‘Proposed
Guidelines’), open for public comments till July 15, 2020 which is proposed to be made
effective from April 1, 2021 or 6 months from the date the same is put up on RBI’s website,
whichever is later. The Guidelines will be applicable to private sector banksincluding Small
Finance Banks (SFBs), Payments Banks (PBs), wholly owned subsidiaries of foreign banks and
foreign banks operating in India under branch model, State Bank of India, Nationalized Banks
and Regional Rural Banks.

The Proposed Guidelines comprises ofrecommendation made by Basel Committee on Banking

Supervision by way of guidelines for corporate governance for banks 2, RBI Circular of March
1992 on Do’s and Don’ts for directors, provisions of Listing Regulations, Calender of review by
Audit Committee3, Recommendations of the Banks Board Bureau4, Companies Act, 2013 and
other RBI circulars issued from time to time.The contents of the Proposed Guidelines has
complied all the instructions/guidelines/directions as stated above and RBI will issue final
guidelines/directions after considering the feedback and suggestions from public.

This article gives a broad overview of the Proposed Guidelines and how the same varies from the
existing requirement under law.

I. Overall responsibilities of the board of directors

A. Responsibilities of the board - culture and values

 The Proposed Guidelines mandates compliance with guidance issued by ICSI on board/
committee meetings;
 Emphasis on setting the correct ‘tone at the top’, ensuring primary responsibility rests with
the CEO and senior management and the CEO and other WTDs are highly visible in
championing the desired values and conduct;

1
https://rbidocs.rbi.org.in/rdocs/Publications/PDFs/DISCUSSION08CA382F39604B10B420A8A43B0DB0C1.PDF
2
https://www.bis.org/bcbs/publ/d328.pdf
3
https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=6090&Mode=0
4
https://banksboardbureau.org.in/upload/PDF/CRBBF19032018_FL.pdf
 Ensuring ‘tone at the middle’ is consistent with the ‘tone at the top’ by implementing
feedback system;
 To ensure the aforesaid, the Banks shall have to frame code of conduct, adopt values that
promotes timely frank discussion, escalation of problems and have a well operationalized and
widely communicated whistle blower policy.

Our Comments

Listing Regulations also set similar responsibility on the Board of listed entities to establish a
corporate culture and values by which executives throughout a group shall behave, a code of
conduct for Board and senior management and whistle blower mechanism for every stakeholder.

The Companies Act, 2013, on the other hand does not talk about having a standard values for
the organization but prescribes a code of conduct for Independent Directors under Schedule IV
and requires certain class of companies to establish a vigil mechanism for employees and
directors.

An appropriate leadership ‘tone at top’ creates ethical corporate culture and describes the
organization’s commitment to ethical decisions. For effective corporate governance, the banks
should be transparent to its stakeholders and therefore its values, code of conduct, whistle
blower mechanism and other supporting policies should be disclosed publicly.

The RBI has not defined the term ‘material concerns’ and therefore guidelines may be issued in
this regard to ensure proper reporting at the end of Banks. Alternatively, it may require the
banks to identify the same in their codes and policies.

B. Responsibilities of the board – recognizing and managing conflict of interest

Take an example where bank enters into a contract with an entity in which one of the board
members has a financial interest. This is one case of conflict between the interest of bank and its
board members, similarly conflict may arise between bank and its senior managers, customers,
group banks (say parent bank, subsidiaries), etc. Accordingly, banks should put in place adequate
policies and measures.

Key Highlights of the Proposal

 Formulate written ‘conflicts of interest’ policy comprising director’s duties to avoid

activities that create/could create/have potential to create conflicts of interest, examples
where conflict can arise, director’s disclosure of any actual/potential conflicts and abstain
from voting on any such matter, procedure for transactions with related parties, approach
on managing any non-compliance, etc;
  The board shall also oversee and be satisfied with the process by which appropriate
public disclosure is made, and/or information is provided to supervisors, relating to the
bank’s policies on actual/potential/perceived conflicts of interest;
 Ensure the process of disclosing information to public, supervisors is consistent with
bank’s policy on conflict of interest.

Our Comments

To avoid any conflict, it will first be appropriate to identify the areas where conflict tof interest
may arise, situations and relationships (both general and specific) that may create conflicts of
interest should be identified by the Board and accordingly appropriate preventive and mitigating
measures for managing different types of situations must be implemented.

The discussion paper requires directors to promptly disclose any matter that may result, or has
already resulted, in a conflict of interest. This should not be restricted to the matters where the
director may have conflict of interest but every conflict in the context of bank’s activities,
customers, employees or other management positions, group entities, external shareholders or
any other related/un-related parties.

Section 184 and 189 of the Companies Act, 2013 also requires directors and KMPs to give
general and specific disclosure as may be required about their concern/interest in any
company(ies), body corporate, firms or other association of individuals, along with
shareholding.

Further, Listing Regulations stipulates that the senior management shall make disclosures to the
board of directors relating to all material, financial and commercial transactions, where they
have personal interest that may have a potential conflict with the interest of the listed entity at
large.

Also, monitoring and managing potential conflicts of interest of management, members of the
board of directors and shareholders, including misuse of corporate assets and abuse in related
party transactions is one of the key functions of the Board of listed entities.

To establish a rigorous review and approval process to be follow by directorsbefore they engage
in certain activities is another imperative proposal to help banks to ensure their actions are
consistent with the policy for conflict of interest.

C. Responsibilities of the board – risk appetite, management and assurance

Banks are in the business of taking risk depending upon its size, complexity and profile of
activities and therefore should have an effective independent risk governance framework. As
defined, this is a framework through which the board establishes the bank’s strategy as well as
risk approach and management takes decisions in adherence to the same; articulate and monitor
adherence to overall risk appetite as well as specific risk limits vis-à-vis bank’s strategy; and
identify, measure, manage or control risks.

The ‘three lines of defence’ model is proposed by RBI for the risk management of banks.

Three-lines of Defence

First Line Second Line Third Line

Business lines - Risk management Internal audit

business units function function

Compliance
Vigilance function
function

Key Highlights of the Proposal:

Business units
 Responsible for ongoing risk management, which includes
identifying, assessing, reporting such exposures considering
the bank’s risk appetite, its policies, procedures and controls.
First line of defence
 Finance function responsible for accounting and financial
data is important for 1st line of defence as a key input to take
risk as well as business decisions.

Risk management function

Responsible for overseeing the bank’s risk-taking activities,

Second line of
assessing risks independently from the first line of defence.
defence
Also, business line managers, those having revenue generating
responsibilities, should also identify and assess risks.

Compliance function
 Responsible to routinely monitor compliance with all applicable
statutes, governance rules, regulations, codes and policies and
report first line of defence and the board about any ‘compliance
risk’.

Internal audit function:

Internal auditors must not be involved in developing,

implementing or operating the first or second line of defence
functions.
Third line of defence
Vigilance function:

Monitor and ensure all transactions are carried out as per

systems, procedures while minimising the scope of
malpractices/misconduct and misuse of funds

 Responsibilities for each line of defence shall be well defined and communicated.
 Board shall develop, communicate to all relevant parties and oversee a ‘Risk Appetite
Statement’ (RAS) - a written articulation of the aggregate level and types of risk that a
bank will accept, or avoid, to achieve its business objectives. It shall include both
quantitative and qualitative measures as appropriate.
 Board shall regularly review key policies and controls with senior management, including
the heads of second and third lines of defence. These reviews shall identify significant
risks, determine areas that need improvement and undertake remedial measures where
needed.
 At least one meeting of the Board must be held exclusively focussed towards fulfilling
the responsibility of ‘risk appetite, management and assurance’.

Our Comments

In the recent past since the banking sector has faced lot of crises and governance lapses,
therefore an effort should be made to enhance the internal governance led by a responsible
board that manages the risk within the banks in line with the prevailing economical and
financial culture. For this, an effective risk governance framework with a strong risk culture
shall be built.

To ensure an effective implementation of the three-lines of defence model:

  Each line of defence shall understand their roles and responsibilities clearly;
 Independence of functions at all three lines of defence;
 Greater accountability of risk by the first line;
 Build better coordination within the second line;
 Adopt new technologies to increase effectiveness and upgrading the model;
 Assessment tools and programs to oversee its implementation and areas of improvement.

D. Responsibilities of the board – oversight of senior management

Key Highlights of the Proposal

 Determine and oversee role/responsibilities of the CEO, WTDs and other senior
management functionaries;
 Enumerate possible consequences (including dismissal) if performance is not aligned
with the board’s performance expectations including adherence to bank’s values, risk
appetite and risk culture;
 Meet regularly with senior management, at least once every year undertake a formal
interaction with the senior management functionaries who are not directors, set
appropriate performance and remuneration standards.

E. Other responsibilities and duties of the board

Ensure that there is a clear demarcation of duties/responsibilities between the board and
management, as also between each of the three lines of defence. Various responsibilities and
duties of the directors include:

 Exercise their ‘duty of care’ [decide and act on an informed and prudent basis] and
‘duty of loyalty’ [act in good faith in the interest of the bank] to the bank under
applicable regulatory/supervisory standards;
 Oversee implementation of the bank’s governance framework and the process of
statutory/regulatory/other requisite disclosures;
 Disclose to the board the nature of interest, direct or indirect, in a contract or arrangement
or any proposed contract or arrangement to be entered between the bank and any other
person;
 Report concerns about unethical behaviour, actual or suspected fraud, or violation of the
bank’s policy;
 not assign, transfer, sublet or encumber rights and obligations as director of the bank to
any third party.
 Our Comments

Directors’ duties are often followed in letter but not in true sprit. For a system to perform
properly, the roles, responsibilities, duties etc. of the senior management and board of the
respective banks must be governed by a set of clearly prescribed rules, the foundation of which
has been proposed by RBI through this discussion paper.

The duties proposed above are in addition to the duties prescribed under Section 166 of the
Companies Act, 2013. The proposed change is welcoming.

II. Board’s structure and practices

A. Committees of the Board

Composition Meetings of the Committee Role of the Committee

AUDIT COMMITTEE OF THE BOARD (ACB)

At least three NEDs  At least 6 times a year and
and two-thirds IDs not more than 60 days shall
elapse between two
All members shall meetings
be financially  Chairperson - ID who shall
literate not chair any other
committee of the Board
 The chair of the bank shall
not be a member of the
Committee
Role of ACB includes:
 approving the appointment of CFO
 appointment, reappointment, removal, remuneration
of auditors/firms/consultants engaged wrtfinancial
reporting
 internal audit reports are made available to the ACB
without management filtering
 if serious acts of omission or commission noticed in
the working of the appointed external firms, their
appointments may be cancelled after giving them
reasonable opportunity to be heard and the fact
shall be reported to RBI and ICAI
 put in place an effective fraud risk assessment as
well as management system which inter alia
involves monitoring/reviewing all the frauds of Rs.
One Crore and above
 reviewing at least once in three years, through
third-party opinions on the design and
effectiveness of the overall financial risk
governance framework as well as internal
 Composition Meetings of the Committee
RISK MANAGEMENT COMMITTEE OF THE BOARD (RMCB)
At least three NEDs  At least 6 times a year and
and two-thirds IDs not more than 60 days shall
elapse between two
One member shall meetings
have risk  Chairperson - ID who shall
management not chair any other
expertise committee of the Board
 The chair of the bank shall
not be a member of the
Committee
 CRO shall function as the
secretary of RMCB
 Head of Compliance shall
also report to the RMCB
NOMINATION AND REMUNERATION COMMITTEE (NRC)
At least three NEDs  At least 6 times a year and
of which at least not more than 60 days shall
half will be elapse between two
independent meetings
directors  Chairperson - ID who shall
not chair any other
committee of the Board
 The head of the human
resource function will
report into the committee
and shall act as the
Secretary to the Committee
Role of the Committee
control system
Role of RMCB includes:
 ensure accurate internal and external data to be able
to identify, assess, mitigate risk, make strategic
business decisions, determine capital and liquidity
adequacy
 set the ‘Risk Appetite’ of the bank based on its
‘Risk Capacity’ by way of formulation of the RAF
and RAS
 based on the “Risk Appetite”, allocate business unit
wide and risk taker wise risk limits
 hold the first line of defence accountable for
breaches in the risk limits
 decide the composition and mandate of various
senior management level sub committees for
specific risks including Asset Liability
Management Committee
Role of NRC includes:
 put in place an induction/ orientation process for
newly appointed NEDs
 once a year, undertake a formal programme for the
directors to help understand their duties as well as
to discharge their duties to the best of their abilities
 formulate/adopt a comprehensive compensation
policy for the board of directors and the
management functionaries
 notifying after the review inter alia the Department
of Supervision, RBI, when a board member ceases
to be qualified or is failing to fulfil his or her
responsibilities
 put in place a policy on learning and development
 Composition Meetings of the Committee Role of the Committee
for the directors as well as senior management.

STAKEHOLDERS RELATIONSHIP COMMITTEE (SRC)

Not proposed Not proposed  In addition to its extant mandate, the SRC shall also
have oversight on matters of depositor interest,
customer service, suitability and appropriateness as
well as various grievance redressal mechanism
thereto.

B. Composition of the Board and Role of Chair

Key Highlights of the Proposal:

 Board shall comprise not less than six directors and not more than 15 directors with
majority being IDs;
 The board shall meet at least six times a year and at least once every sixty days. All
meetings should have a majority of independent directors and shall meet with a quorum
of five members;
 The board shall not have more than three directors who are directors of companies
which among themselves are entitled to exercise more than 20% of the total voting
rights of all the shareholders of the bank;
 It must be ensured that the minutes of the meeting of the board as well as its committees
are so recorded that it shall be possible to appreciate the quality of deliberations including
individual directors view on the matter, independence of directors, critical decisions
made, dissenting views expressed and discussed within the decision-making process;
 Within six months of issuance of the guideline/directions on the matter by the RBI (basis
this discussion paper), the composition of board and its committees shall be complied
with.
 Chair of its board shall be an independent director. Appointment of the Chair of a
banking company shall be with the previous approval of the Reserve Bank and be subject
to such conditions as the Reserve Bank may specify while giving such approval;
 Role of Chair:
o ensure that board decisions are taken on a sound and well-informed basis, promote
critical discussion, dedicate sufficient time to the exercise of his or her
responsibilities;
o The appointment of the Chair shall be with the previous approval of the RBI and be
subject to such conditions as the RBI may specify while giving such approval.
 Our Comments

One ID chairing a committee will not be able to chair another committee. By this, RBI for every
committee has proposed more stringent norms with an intent of more focused, managed and
directed committees. This step will decentralize and help in non-interference of one chairperson
into the chairmanship of other committees; thereby each committee will be independently
chaired by a different independent director.

To achieve the principle of segregating ownership and management, RBI has proposed that the
board shall not have more than three directors who are directors of companies which among
themselves are entitled to exercise more than 20% of the total voting rights of all the
shareholders of the bank

The idea is that the management of the banks shall not be in hands of directors having
shareholding interest of more than 20% as it may lead to chances of biasness

III. Qualification and Selection of the Board Members

The Board is an important link for a good corporate governance framework. Therefore, the
members of the board collectively and individually must be capable to understand and perform
their governance role and take a sound and objective based judgment in favor of the bank.

Key Highlights of the Proposal:

 Atleast half of the board:

Shall:
o shall have special knowledge or practical experience in relevant fields;
o at least one director shall represent agriculture and/or rural economy, and another
shall represent cooperation and/or small-scale industry
Shall not
o have substantial interest or;
o be a proprietorof any trading, commercial or industrial concern
 Directors of an entity other than a bank may be appointed as director on the board of a
bank subject to certain conditions such as he is not the owner of an NBFC or NBFI, not
an investor with managerial control in an NBFC or NBFI, not a full-time employee in an
NBFC or NBFI, etc.
 In addition to the disqualifications prescribed in the Banking Regulation Act, 1949 and
the Companies Act, 2013 or other applicable statutes for being appointed as director, the
 additional standards of disqualification is prescribed, such as proposed appointee should
not be a member of the board of any bank or the RBI or an entity holding any other bank.
 The total continuous tenure of an NED on the board, including the tenure as a Chair shall
not exceed eight years and may be re-appointed after a minimum gap of three years.
The upper age limit for NEDs is 70 years
 The member of the NRC proposing the name of a person for appointment as a director
shall not be part of the exercise of conduct of due diligence.
 While deciding on appointment/ re-appointment of candidates as director, NRC of a
banking company shall adopt the criteria prescribed by RBI in August 2019 for elected
directors of PSBs and suitably modified for a banking company.
 Before a person assumes the role of a director, a ‘Deed of Covenant’ must be signed
between the director and the CEO or any other person authorised by the board
 It shall be ensured not to award any professional work to a person who was a director of
the bank, for a period of two years after demitting office as such director

Our Comments

Considering the role of Board it plays in running the operations of banks, stringent set of
disqualification criteria has been proposed in addition to the existing disqualification prescribed
under the Companies Act, 2013 and the Banking Regulations Act.

Further, proposing a gap of 3 years for re-appointment as NED post completion of 8 consecutive
years will ensure independence and un-biased decision making of the NED on the Board

IV.Senior Management – role, expectations, selection

Senior Management is involved in day-to-day affairs of the organization and are responsible for
the overall operations and its profitability. The decisions of Banks are controlled and undertaken
by the Senior Management within the sight of Boards Supervision.They control bank’s sound
governance through personal conduct.

Key Highlights of the Proposal:

 Senior management belonging to there-lines of defense should be clearly identified;

 Senior management shall disclose financial and commercial transactions where they have
personal interest that may have an actual/potential/perceived conflict of interest with the
bank;
 All personal interest of senior management in transactions of bank shall be disclosed to
Board;
  Senior management is responsible for delegating duties to staff and shall establish a
management structure that promotes accountability as also transparency throughout the
bank;
 To transit ownership managerial leadership to a professional management and stabilize
its operations, a time limit of 10 years has been provided to promoters / major
shareholders of a bank acting as WTD or CEO;
 The bank shall also have an internal policy regarding succession planning in senior
management;
 Entities incorporated in India shall have a CEO who can also be the MD of the bank. The
upper age limit for CEO/WTDs is 70 years;
 Appointment/re-appointment/termination of appointment of WTDs and CEO of a
banking company shall be with the previous approval of the Reserve Bank;
 A management functionary who is not a promoter / major shareholder can be a WTD or
CEO of a bank for 15 consecutive years. Thereafter, the individual shall be eligible for
re-appointment only after the expiration of three years.

Our Comments

The senior management heads the execution hierarchy of the organizationand is accountable to
the board. The proposal grants ample guidance to the banks in order to appoint appropriate
people required at senior management.

Further, the proposal to separate ownership from management will bring a new reform to the
banking sector. The transition of ownership managerial leadership to a professional
managementof banks will bring an organized division between the roles of management and
ownership. Further, professionals with diverse skills will now be able to contribute in taking
better decisions for the banks.

On the date of issuance of the guideline/directions by the RBI (basis this discussion paper),
banks with WTDs or CEO who have completed 10 or 15 years shall have two years or upto the
expiry of the current tenure, whichever is later, to identify and appoint a successor.

V. Risk Management
One of the key elements of Corporate Governance, specifically for institutions working in
financial sector such as Bank is Risk Management. The Banks have exposure to a large number
of investors, depositors, industries and other sectors. Survival of banks has a direct impact on the
economy and society as a whole. Therefore, it is always a great matter of concern for the
governments.

Key Highlights of the Proposal:

  Risk Management Function (RMF) shall be part of second line of defence of Bank.
 It not be employed in other task by the Bank and shall report only to Risk Management
Committee of Board (RMCB)
 It shall set up proper framework for Risk Management constituting of Risk Policy and
well Risk Appetite of Bank among other things.
 Designate Chief Risk Officer(CRO)who shall report to the RMCB which will be
responsible for selection, oversight of performance including performance appraisals and,
if necessary, dismissal of the CRO.
 Any premature removal of the CRO shall only be with prior approval of the board and
shall be disclosed publicly. The reasons for such removal shall be disclosed to the
Department of Supervision, Reserve Bank of India.

Our Comments

The banks are currently required to have a Risk Management Committee along with Credit Risk
Committee as per Risk Management Systems in Banks issued by RBI. The appointment of a CRO
directly reporting to RMCB which is similar to the requirement prescribed for NBFCs under
Master Direction for Systemically Important Non-Deposit taking Company and Deposit taking
Company, shall give a good deal of thrust to RMF and hence enhance performance along with
protecting long term interest of banks, which play a pivotal role in ensuring health of
theeconomy.

VI.Compliance

Whenever a fraud or failed business ventures are closely analysed lack of adherence to legal
regime in letter and in form is a common element found among such firms. Hence, compliance is
always a priority of Board.

Key Highlights of the Proposal:

 The compliance function and its functionaries shall:

o be accountable and report only to the RMCB;
o assess compliance risk in all activities undertaken by the first line of defence;
o be empowered to conduct compliance reviews / investigations, whenever required;
o ensure that regulatory guidelines/instructions/directions are promptly issued/
disseminated within the organisation (including senior management), with
clarifications should the need arise;
o put in place approval process for all new processes and products by the compliance
function prior to introduction;
 o put in place a mechanism to ensure that compliance to various supervisory
requirements as communicated by the Reserve Bank from time to time, are achieved
within the specified timeframe.

 The Committee proposes setting up of an Independent Compliance Function which shall

form part of Banks 2nd line of Defence;
 The Compliance Function shall have responsibility of address Compliance Risk;
 The head of compliance function, to be designated as ‘Chief Compliance Officer (CCO)’,
shall report to the RMCB which will be responsible for selection, oversight of
performance including performance appraisals and, if necessary, dismissal of CCO. Any
premature removal of the CCO shall only be with prior approval of the board and shall be
disclosed publicly. The reasons for such removal shall be disclosed to the Department of
Supervision, Reserve Bank of India;
 The role and responsibilities of the CCO shall be clearly defined;
 The Compliance functionaries shall have direct access to the RMCB;
 The effectiveness of the compliance function will be subject to independent review by the
RMCB at least annually.

Our Comments

Responsibility of having all compliances in shape is with the board of the company. The changes
proposed would surely help creating a mechanism of operating with integrity and setting up a
mechanism of compliance management system

VII. Secretary to the Board

Secretary to the Board plays a very vital role in ensuring not only compliance but also smooth
functioning of Board processes along with advising Board on the matters of Corporate
Governance.

Key Highlights of the Proposal:

 A Company Secretary, being a member of ICSI shall be required to be appointed to as

Secretary to the Board of Bank, whether listed or unlisted.
 The secretary shall report to the Chair of the board.
 The performance assessment of Secretary shall not be done by the management of the
bank. However, it can be undertaken by the NRC
 The secretary shall make available the agenda and minutes of the meeting of the
committee/board as per the professional guidelines
 Banks shall undertake Secretarial Audit under Section 204 of the Companies Act, 2013.
  The Secretarial Audit report shall be made available to the ACB which shall have an
oversight over compliance to various gaps reported by the audit.
 The budget as well as the compensation of the functionaries in the Company Secretariat
shall be recommended jointly by ACB as well as NRC and approved by the board.

Our Comments
A company secretary is a professional who is well versed with the compliances and legal
requirements of listed companies, unlisted companies, companies incorporated under
Companies Act, 2013 or otherwise.

At present, pursuant to Rule 8A of the Companies (Appointment and Remuneration of

Managerial Personnel) Rules, 2014, every private company which has a paid up share
capital of ten crore rupees or more shall have a whole -time company secretary (effective
from 01.04.2020). Also, in case of listed entities, CS acts as a Compliance Officer of the
company. Mandating appointment of CS in banks as well will help in ensuring proper
governance in banks. The secretary to the board would help it to design a proper Framework
of Corporate Governance as well as enhance Boards Compliance Management framework.
The secretarial Audit shall help review and find any short coming in the same.

VIII. Internal Audit

Internal Audit is a prudent Measure in order to asses and deal with any shortcomings within the
functioning of Bank.

Key Highlights of the Proposal:

 The internal audit function and its functionaries shall:

a. be accountable and report only to the board through the ACB;
b. be independent of audited activities;
c. require internal auditors to adhere to professional standards applicable in India;
d. be able to ensure timely as well as effective correction of audit issues by senior
management through escalation processes including enforcement and disciplinary
process including dismissal.

 The Internal Audit shall form 3rdline of defence of Bank and shall not be involved in
advisory function;
 In internal audit all functions of 1 stand 2ndline of defence shall be audited;
 The Internal audit functionaries shall be directly reportable to the audit Committee;
  It shall provide Board a reasonable assurance that proper internal control measures are in
place in functioning of 1stand 2ndline of defence;
 Internal audit functionaries shall have direct access to the ACB;
 In addition to the extant instructions of the RBI on statutory audit, and in the interest of
auditor independence, an external auditor / audit firm undertaking any assignment in a
bank should not be given any other assignment in the same bank for a period of at least
one year from the completion of the assignment;
 The internal audit function shall not be outsourced. However, where required, experts
including former employees can be hired on contractual basis subject to the ACB being
reassured that such expertise do not exist within the audit function of the bank;
 The head of internal audit function to be designated ‘Head – Internal Audit (HIA)’, with
reporting line to the ACB. The ACB will be responsible for selection, oversight of
performance including performance appraisals and, if necessary, dismissal of the HIA.
Any premature removal of the HIA shall only be with prior approval of the board and
shall be disclosed publicly. The reasons for such removal shall be disclosed to the
Department of Supervision, RBI.

IX.Vigilance

The word ‘vigilance’ means alertness, watchfulness or circumspection. Banks should inculcate a
sense of alertness and awareness, and widespread compliance with systems and procedures in the
daily functions of the bank. Being vigilant is a key Factor for prevention of any fraud or
undesirable event

Key Highlights of the Proposal:

 The bank shall formulate a vigil/whistle blower policy for directors, employees and
third parties to report genuine concerns;
 The vigilance functions shall broadly include
o Preventive vigilance;
o Surveillance and detection; and
o Punitive vigilance.
 The policy shall provide for safeguard as well as awarding of the whistle blower;
 The vigilance function of the bank shall be headed by an officer to be designated as
Chief of Internal Vigilance (CIV);
 The CIV’s reporting line shall be to ACB;
 the board of the bank, through the ACB, is responsible for establishing an internal
vigilance policy.
 X. Compensation

A balanced Compensation is a key component of governance incentive structure by which board

promotes good performance. A relative low compensation can result in outflow of talent from
the organization and it will be difficult to attract new talents as well.

Key Highlights of the Proposal:

 While compensation of WTDs as well as other employees of a banking company shall be

governed by the guidelines in DOR.Appt.BC.No.23/29.67.001/2019-20 dated November
04, 2019 as amended from time to time, the NRC shall, with the approval of the board of
directors also formulate and adopt a comprehensive compensation policy for the NED;
 The board, through its NRC would be responsible for oversight of management’s
implementation of compensation system for the entire bank;
 For granting remuneration to a part-time non-executive Chairman, prior approval of the
RBI will be required under Section 10B(1A) (i) and 35B of the Banking Regulation Act,
1949. Banks are required to make disclosure on remuneration paid to the directors on an
annual basis at the minimum, in their Annual Financial Statements.

Other reading materials on the similar topic:

1. ‘RBI proposes to consolidate guidelines on Governance for commercial banks’ can be viewed
here
2. ‘Decriminalisation of offences –MCA forms a review committee’ can be viewed here
3. ‘The Companies(Amendment) Ordinance, 2018 - A milestone in restructuring of offences’ can be
viewed here
4. ‘The Companies (Amendment) Ordinance, 2019 - a move towards decriminalization of offences
under the Companies Act, 2013!’ can be viewed here
5. Our other articles on various topics can be read at: http://vinodkothari.com/

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