Sucheta Dalal :The other side of the Kidwai case
Sucheta Dalal

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The other side of the Kidwai case  

Aug 21, 2006

Pardon me for being a spoilsport, but I find the Reserve Bank of India (RBI) bashing on the Naina Lal Kidwai case perplexing and completely out of proportion. From what I gather, Section 10 of the Banking Regulation Act explicitly states the head of a bank (whether executive chairman or managing director) cannot be on the board of any company other than a not-for-profit company or a banking subsidiary. Thanks to the provisions of this Act, even Deepak Parekh as chairman of HDFC could not be a director of HDFC Bank, although it made its debut riding on the parent company’s brand value and goodwill.


Why then should Ms Kidwai be an exception? According to HongKong & Shanghai Banking Corporation (HSBC) sources quoted by the media, the bank assumed RBI would permit Ms Kidwai’s presence on Nestle’s global board because HSBC’s Indian outfit is just a branch. But consider how much more unfair it would be to Indian bank CEOs if foreign banks are allowed more latitude because they are branch offices. In fact, Indian bankers insist the RBI is already far more liberal about foreign banks operating in India than their home countries are with regard to foreigners.


We can debate if the banking law, as it exists, is an ass and whether it needs overhauling to ensure it moves with the times, but that may not necessarily lead to a change in the rules. Several countries, including Malaysia, insist on foreign banks seeking local incorporation. If Indian rules were as stringent, the RBI would have been able to quote chapter and verse of the Banking Regulation Act to justify its decision and not expose itself to this controversy by objecting on grounds of “potential conflict of interest.” The rules regarding bank CEOs being on the boards of companies also differ across countries. While the US, the UK and Germany permit CEOs to be on corporate boards, the French do not, says a banker. Even among the Asian tigers, the rules vary from country to country.


One paper told us that “Bankers are angry that RBI has asked Naina Lal Kidwai to choose between a seat on multinational Nestle’s board as an independent director and the CEO’s chair at HSBC India.” The bankers I checked with were not angry at all; in fact, they would have been outraged if RBI had winked at the rules for a foreign bank CEO because she was invited to a MNC’s global board. They point out that Ms Kidwai was already the CEO-designate of HSBC when appointed to the Nestle board.


We are all proud of Ms Kidwai’s many achievements and their international recognition, but letting her remain on Nestle’s board would have been unfair to Indian banks and companies who have to follow the rules


An informal consultation with the RBI would have clarified the rules for her and avoided the needless controversy triggered by her subsequent resignation from the Nestle board that made the Indian regulator look bad.


They did, however, think that the controversy may be a good trigger to re-examine the statute by setting up a broad-based committee to check global trends. This committee could also re-examine other issues raised in the past week. For instance, why are the rules less stringent for non-banking finance companies? Or, why is it okay for bank directors to be on corporate boards but not CEOs? It could also examine why there is no conflict in industrialists being on the boards of the Reserve Bank of India, public sector banks and financial institutions. This is especially in need of re-examination, because it is well known that the appointments are wangled through political connections and there is considerable history of their misuse.


The Industrial Development Bank of India (IDBI), in its days as a development finance institution had run up significant bad loans by lending to dubious projects of its industrialist-directors. Even today, there are many anecdotal reports about industrialists and their political friends influencing public sector banks and making a mockery of corporate governance regulations that apply to listed entities.


So, by all means let’s re-examine the statute. But let us not vilify the central bank for following the law of the land in letter and in spirit. We are all proud of Ms Kidwai’s many achievements and their international recognition, but letting her remain on the Nestle board would have been unfair to Indian banks and companies who are forced to follow the rules.


-- Sucheta Dalal