Three new developments herald a possible new beginning for Paytm Payments Bank (PPB): The reconstitution of its board of directors, apparently due to pressure from the Reserve Bank of India (RBI); the stepping down of Vijay Shekhar Sharma (51% shareholder of PPB) as part-time chairman and the induction of former government bankers and a former government bureaucrat as independent directors (IDs). The reconstitution of the board, and the withdrawal of the nominee directors of One 97 Communication (49% shareholder in PPB), were likely necessary to prevent the interference of shareholders in the operations of the bank as well as their influence on IDs.
The Reserve Bank of India’s (RBI) earlier curbing of operations of PPB highlights how IDs, who are meant to protect the interests of customers and the general public, instead align themselves with promoter interests when there is a dominant shareholder on the board. A positive outcome is that IDs who remained silent and declined to either rectify the deficiencies highlighted by the regulator, or resign at the appropriate stage, can no longer go unpunished. Proxy advisory firms are right to consider them unfit to serve on a corporate board of directors.
History of Regulatory Action against Paytm Payments Bank
The independent directors shall: (1) help in bringing an independent judgment to bear on the Board’s deliberations especially on issues of strategy, performance, risk management, resources, key appointments and standards of conduct; (2) bring an objective view in the evaluation of the performance of board and management; (3) scrutinise the performance of management in meeting agreed goals and objectives and monitor the reporting of performance; (4) satisfy themselves on the integrity of financial information and that financial controls and the systems of risk management are robust and defensible;
III. Duties:
(6) where they have concerns about the running of the company or a proposed action, ensure that these are addressed by the Board and, to the extent that they are not resolved, insist that their concerns are recorded in the minutes of the Board meeting;
When the RBI documents various violations and penalises a bank, it should be taken extremely seriously by the board of directors. Typically, the Audit Committee (in which Vaibhav Goel, Manju Agarwal and Sairee Chahal were present as ID members) and sometimes the Risk Management Committee (with Ramesh Abhishek, Manju Agarwal and Shinjini Kumar as ID members) will examine the issues raised by RBI more closely. The board appoints a compliance officer to ensure that the issues highlighted by the regulator are addressed. A time-bound compliance report has to be first submitted to the board, notifying it that the bank has complied with the RBI’s directive and addressed its concerns. This report is thereafter sent to the RBI.
Audit and Risk Management Committee of PPB in FY2023
[1] Highlighted in SES Proxy Advisory Report of CMS Info Systems Ltd.
Note: On March 1, 2024 Manju Agarwal resigned as an independent director from CMS Info Systems just prior to the postal ballot on her reappointment being concluded.
This article was also published in The Wire.in and can be read here.
DISCLOSURE
I, Hemindra Kishen Hazari, am a Securities and Exchange Board of India (SEBI) registered independent research analyst (Regd. No. INH000000594). Please see SEBI disclosure here. Investment in securities market are subject to market risks. Read all the related documents before investing. Registration granted by SEBI and certification from NISM in no way guarantee performance of the intermediary or provide any assurance of returns to investors.The securities quoted are for illustration only and are not recommendary. I have no exposure to Paytm Payments Bank or to One 97 Communications. Views expressed in this Insight accurately reflect my personal opinion about the referenced securities and issuers and/or other subject matter as appropriate. This Insight does not contain and is not based on any non-public, material information. To the best of my knowledge, the views expressed in this Insight comply with Indian law as well as applicable law in the country from which it is posted. I have not been commissioned to write this Insight or hold any specific opinion on the securities referenced therein. This Insight is for informational purposes only and is not intended to provide financial, investment or other professional advice. It should not be construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any security.
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It was...
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