Mumbai: The Reserve Bank of India (RBI) on Monday said that a bank founder can remain CEO for 12 years, which can go up to 15 based on the discretion of the central bank. It also said that CEOs who have already completed the prescribed term on the date of these instructions coming into effect can complete their current term as already approved by the RBI.

Currently, the longest-serving chief executive of a commercial bank is Uday Kotak of Kotak Mahindra Bank who has been CEO since the bank received its licence in 2003. The RBI had approved a three-year extension from January 1 for him to continue as CEO.

According to a note by Macquarie Research, Kotak, whose term ends on January 2, 2024, will not be eligible for reappointment as he has already completed 15 years as MD & CEO. “Also, in our view, the second in line Dipak Gupta (current joint MD) may not be eligible to succeed as the CEO as the 15-year cap applies for all whole-time directors (WTD) on the board,” the note said. Last year, the bank appointed Gaurang Shah and K V S Manian, veteran ‘Kotakites’, as whole-time directors.

The central bank had floated a discussion paper on ‘Governance in commercial banks in India’ on June 11, 2020 to review the framework for governance in commercial banks. The final guidelines have been based on the feedback received. The norms fix an upper age limit of 75 years for all directors and they can be on board for a maximum of two consecutive four-year terms.

The new norms will apply to all private lenders including small finance banks. In respect of State Bank of India and nationalised banks, these guidelines would apply to the extent they are consistent with laws applicable to these banks. The circular will not be applicable in the case of foreign banks operating as branches in India.

Besides the CEO tenure, the norms require every bank to have an audit committee of the board (ACB) constituted with only non-executive directors (NEDs), excluding the chairperson. Banks are also required to have board-level risk management committee and a nomination and remuneration committee. The RBI further added that the current upper age limit of 70 years will continue to apply for CEOs of private banks and bank boards are free to prescribe a lower age limit.

Besides Kotak, another bank that could face uncertainty is Bandhan Bank if the RBI chooses to factor in the tenure of the CEO before the conversion of the finance company into a bank. “The RBI has said that while examining the matter of re-appointment of such MD & CEOs or whole-time directors within the 12/15-year period, the level of progress and adherence to the milestones for dilution of promoters’ shareholding in the bank shall also be factored in and, considering Bandhan’s track record in meeting these shareholding norms, there perhaps could be a reluctance from the RBI in our view,” said Macquarie.

According to Rajesh Narain Gupta, managing partner at legal firm SNG & Partners, “To put a cap of 15 years for the top position is a sound proposition — it gives enough time for the vision to be implemented and for the successor to be identified. It de-risks the organisation of a dominant control and concentration of power, which has recently seen the failure of a large bank and NBFCs. It is a good move from the corporate governance point of view in the long term and creates opportunity for new ideas and talent.”