Detailed regulations and codes defining powers and duties of the Board of Directors of public/private limited companies and that of individual directors of these bodies are enumerated in the Indian Companies Act,1956 governing Companies incorporated under the Act. Regulatory authorities like DOC, CLB, SEBI ensure their due compliance. However these provisions are not applicable to banking companies in particular PSBs, as these bodies are not covered by the Indian Companies Act. This has disabled an effective and constructive watchdog role by the Board to oversee and counter-balance the proper functioning of executive officers. In many cases Boards of banks remain without any real awareness of significant developments in these institutions, as there are no guidelines to communicate specific developments to the Boards. This has resulted in their failure towards proper superintendence on the working of the Institutions. Crucial decisions are taken by the CEO without reference to the Board and these are not properly or fully intimated to the Board even subsequently. The problem came to be highlighted when scams emerged in the working of Banks like Global Trust Bank and Benaras State Bank, in the years 2000 and 2001.

This anomaly has been receiving the attention of RBI. In this background the Governor RBI, while announcing the Mid-Term Review of Monetary and Credit Policy for the year 2001-2002 on October 22, 2001 highlighted this structural drawback. Reviewing the impact of recent developments on long-term objective of financial sector reforms, Mr. Bimal Jalan, the governor observed as follows:

"Recent events have also brought to the fore the need for Boards of banks and financial institutions to exercise proper vigilance and supervision over the functioning of commercial banking and other financial institutions. In recent years, as part of on-going financial sector reforms, much greater autonomy and powers have been entrusted to their Boards, to lay down effective internal guidelines and procedures for transparency, disclosure, risk and asset-liability management. Yet, it has been noticed that in some cases, the policy laid down by the Boards was either flouted with impunity or the Board itself had failed to lay down appropriate internal guidelines for minimizing risks and over-lending a certain entities without adequate security. If problems of the type which have surfaced recently are to be avoided in the future, within the framework of a deregulated and liberal financial system, the role of Boards become crucial. The Reserve Bank proposes to set up a consultative group of directors of a select group of commercial banks and financial institutions to suggest, for consideration by the government /RBI , measures that should be taken to strengthen the internal supervisory role of Boards"

Accordingly, and in consultation with the Indian Bank's Association it has been decided by RBI to constitute a Consultative Group headed by Dr A.S. Ganguly, Director, Central Board of RBI, to make recommendations towards the more effective functioning of bank boards. The Group was to review the supervisory role of Boards of banks and financial institutions and to obtain feedback on the functioning of the Boards vis-�-vis compliance, transparency, disclosures, audit committees etc. and submit recommendations for making the role of Board of Directors more effective with a view to minimising risks and over-exposure. The Group was constituted during November 2001 and it was to submit its report within three months.

The terms of reference of the Group are as following:

1. To review the supervisory role of Boards of banks and financial institutions and to obtain feedback on the functioning of the Boards vis-�-vis compliance, transparency, disclosures, audit committees, etc.

2. To study the system prevalent in banks / financial institutions for monitoring by the Board, the implementation of the policies laid down by it.

3. To make recommendations for making the role of Board of Directors more effective with a view to minimising risks and over-exposure.

4. Any other matter relevant to the subject

The group conducted exhaustive deliberations and submitted its report to RBI in April 2002. The report has conveyed several significant and far-reaching recommendations and is hailed as a landmark in corporate governance in the financial sector. The group said banks could be asked to come up with a strategy for implementation of the governance standards recommended. Once the strategy is received from all banks, a periodical review of the progress of its implementation could be undertaken. RBI has forwarded the report to banks for perusal and action by their boards.

As a step towards effective corporate governance, the Group has stated that it would be "desirable to take an undertaking from every director to the effect that they have gone through the guidelines defining their role and responsibilities and understood what is expected of them and enter into a covenant to discharge their responsibilities to the best of their abilities, individually and collectively".

Further commenting on this recommendation the Financial Express has observed as under:

"The Ganguly Group report has attached a comprehensive questionnaire for independent/non-executive directors and, more importantly, a Form of Deed of Covenants With a Director. A perusal of the Deed of Covenants would make clear that the directors have considerably enhanced responsibility than assumed by most board members. The report puts a lot of onus on the independent/non-executive directors. If the recommendations are implemented in the right spirit, the banks/institutions will become truly board-run institutions. It is important that independent/non-executive directors have clear understanding of their responsibilities and CEOs, in turn, recognise that the rules of the ball game have changed. For attaining a quantum jump in the effectiveness of boards, the directors must have a clear delineation of their duties and those of the CEO. This is easier said than done. As the board function goes through protean stages of development, the directors and CEO have to work in a mutually supportive manner. There can be no written manual on the relationship." (S S TARAPORE, columnist in Financial Express)

1. Appropriate due diligence procedures be established for appointment of directors on the boards of private sector banks.

2. In the case of private sector banks, where promoter directors may act in concert, the independent/non-executive directors should provide effective checks and balances ensuring that the bank does not build up exposures to entities connected with the promoters or their associates.

3. The Government, while nominating directors on the boards of public sector banks should be guided by certain broad "fit and proper'' norms for directors. The criteria suggested by Bank for International Settlements (BIS) may be suitably adopted. It was suggested that in large public sector banks, the office of chairman and managing director be separated.

4. The group further recommended creating a pool of professional and talented people for board-level appointments in banks and that the RBI should maintain the data for the purpose. It, however, said the current level of remuneration for directors was grossly inadequate to attract qualified professional people.

5. The group suggested that there could be a "supervisory committee'' of the board in all banks, private or public, which will work on collective trust and at the same time without diluting the overall responsibility of the board. Another suggestion of the group was that nomination committees of boards be set up to recommend appointment of independent non-executive directors.

The above are the gist of some of the core recommendations. You may view detailed recommendations of the Group in the following pages. Those who desired to study only the gist of the recommendations of the Group may view Executive Summary

Those more interested about the developing concept of Corporate Governance may view the detailed narration through the links provided above in the Table of Contents.