Effective corporate governance vital, banks told
can be restricted to stakeBS REPORTER
holders. But if a bank fails, Mumbai, 14 November
the impact can spread rapid
BEING at centre of the economy, banks must ensure effective corporate governance to avoid the spread of failures to the financial system, the Reserve Bank of India (RBI) has said.
Issues related to corporate governance that need adequate attention include bank ownership, accountability, transparency and ethics compensation, RBI has said in the Report on Trend and Progress of Banking in India 2010-11.
Splitting the posts of chairman and chief executive officer in banks and corporate governance under a financial holding company structure also deserve adequate attention, it said.
Banks are interconnected in diverse, complex and opaque ways, underscoring their contagion potential. If acorporate fails, the fallout ly to other banks, with potentially serious consequences for the entire system, the central bank said. It added the corporate governance of banks was not only different, but also more critical.
Banks are the conduits of monetary policy transmission and constitute the economys payment and settlement system. Also, by the very nature of their business, banks are highly leveraged, the report said. Banks accept large public funds as deposits in a fiduciary capacity and further leverage these funds through credit creation, RBI said.
Regulation has a role to play in ensuring robust corporate standards in banks. However, though effective regulation is necessary, it is not a sufficient condition for good corporate governance, RBI added.
MERGINGIN
The newly-appointed Competition Commission of India (CCI) Chairman, Ashok Chawla, is ahead of our scheduled time of meeting. As I enter Spice Route – the dimly-lit restaurant at The Imperial – and ask the waiter to look for a quiet corner, I spot Chawla already seated and find that he has chosen a place that has more light than the rest of the restaurant. “You see, I came early because I was afraid that the traffic might delay me,” says Chawla, clad in his trademark dark suit and a crimson-red tie. A four-decade long stint in government service does not seem to have affected him in any way. He has neither lost that smile, nor have his mannerisms changed. He says he still prefers spending his evenings in a quiet corner of his home with his family, writes A K Bhattacharya .
Chawla was not an automatic choice for the job he holds now — overseeing mergers and acquisitions of companies as a regulator. After an M A in Economics from the Delhi School of Economics in 1972, Chawla did what most young men and women did those days — prepare for examinations to qualify as an Indian Administrative Service officer or as a State Bank of India probationary officer. He qualified for both. So, he served the country’s largest bank for a few months before joining the government as an IAS officer to be part of the famed steel frame. He was allotted Gujarat for his state posting, a state he had never been to and where he eventually spent the first 11 years as a civil servant. But very early in his career, fortuitous developments made him a collector in an important district like Ahmedabad.
As Chawla is about to reveal what those fortuitous developments were, I interrupt him to enquire about his food preferences. He is not averse to sea food and wants to go straight to the main course without much ado. I insist that he must have a soup at least. Chawla relents and after some more deliberation, we settle for Tom Kha with chicken for both of us. For the main course, Chawla goes for jumbo prawns in tomato sauce and steamed rice, and Ifollow suit. With the ordering out of our way, Chawla is back to narrating how he was made a collector of as large adistrict as Ahmedabad barely six years after his induction into the service. The new governor of Gujarat, Sharada Mukherjee, insisted on the Ahmedabad collector to be his secretary and that created a vacancy. The state government decided to fill that slot with Chawla since it did not want to disturb any other officer with elections around the corner.
The soup has arrived and Chawla likes it. His stints at the Centre, which all IAS officers long for, were very few and all of them were in key economic ministries. The first time he came to New Delhi was in 1983, as deputy secretary in the department of economic affairs in the finance ministry. He would return to this department twice later in his long career — in 2005 as additional secretary and again in 2008 as the finance secretary. Chawla does not suppress his sense of achievement in being associated with key economic ministries and departments throughout his career. His stint in Washington as an economic counsellor in the Indian embassy from 1986 to 1991 was an eye-opener for him since he was privy to various initiatives that the government was taking to avert a payments crisis. Jumbo prawns have arrived with abowl of steamed rice, but Chawla is keen on narrating how his return to Gujarat in the early 1990s honed his skills as a manager. In Ahmedabad, he was asked to take charge of the Sardar Sarovar Narmada Nigam that was to have implemented a massive irrigation project, but the funding of which became a big question mark, with the World Bank and the Japanese government pulling out of their commitment in the wake of environment concerns.
Chimanbhai Patel, chief minister of Gujarat at that time, asked Chawla to do whatever possible to raise funds. Chawla met many bankers and funding agencies in Mumbai. All of them met him for a cup of tea, but when it came to funding the project, beat a hasty retreat. “Only one man came out with a novel idea. Nimesh Kampani of JM Financial said the Nigam could offer deep discount bonds to raise `300 crore for the project,” Chawla says. Soon, the bonds were floated and they were a big success, raising almost `600 crore. The problem, now, was with the markets regulator that insisted that the Sardar Sarovar Narmada Nigam could retain only 25 per cent more than it had originally planned to raise. “The chief minister said, let us not be greedy and we settled for `375 crore and that was perhaps for the first time that long-term bonds were issued to finance irrigation projects in the country,”Chawla says with unconcealed pride.
There was another development that Chawla would never like to forget.
He has the rare privilege of being Mukesh Ambani’s predecessor. As a joint secretary in the ministry of petrochemicals, he had the additional responsibility of heading the Vadodarabased Indian Petrochemicals Corporation Limited (IPCL). That was 2001. The petrochemical giant was up for sale under the privatisation plan put in place by the Atal Bihari Vajpayee government. Reliance Industries Limited won the bid for acquiring a controlling stake in IPCL and one fine morning Mukesh Ambani walked into the company to take charge from Chawla. I ask him if, as the CCI head now, he feels that the acquisition of IPCL by Reliance Industries violated any norms. Chawla looks distracted. After abrief pause, he says the market dominance issues were examined by the government before the acquisition was allowed. “You see, it was then felt that the petrochemicals market was contestable with easy imports and, therefore, there was no fear on the market dominance front,” he says. I do not look convinced by his explanation. He then adds that of course today the situation could be different under a new architecture of a competition law.
Chawla is finished with his main course, but we have not had the time to discuss anything about his plans as head of CCI. I remind him that during his stint in the civil aviation ministry also, there was some controversy over the merger of Air India and Indian Airlines. Chawla admits that merger of two public sector companies is a big challenge and there are cultural issues that need to be understood before any such exercise is undertaken. Did the government allow private airlines to grow at the expense of the state-owned airlines? Chawla says it was a difficult call. Do you want to protect the market for a state-owned airline or allow private operators to grow to meet rising demand for air travel, he asks.
Iam keen on prolonging the discussion and ask Chawla what he’d like for dessert. No, he says, adding that he would only have Darjeeling tea. While we place the order, I ask Chawla if he is happy with the way different sector regulators are gradually encroaching into the territory earmarked for CCI by laying down their own rules of mergers and acquisitions. “Let me state the facts. Mergers in the banking space are already outside my purview, even though I, as finance secretary, had opposed the idea. As for other sector regulators, the rule is not clear, but what we want is that every sector regulator must seek our views on the merger and acquisition norms before giving them a final shape. If that happens, then we should be okay and in any case all these mergers and acquisitions would have to seek our clearance before they can take effect,” Chawla says quite confidently.
Tea has arrived and I ask my last question: What keeps him awake at night? Chawla is amused, but says he has three challenges. He has to build the architecture of competition law with caution and carefully. He has to ensure that the approval procedures are expeditious. And finally, he has to build human resources capacity so that the new system can be implemented fairly and efficiently. Chawla’s vision as the new head of CCI seems to be clear and as we wind up our lunch, I get the feeling that Chawla has not yet allowed the enormity of his new responsibility to get the better of him.
ILLUSTRATION: BINAY SINHA
LUNCH WITH BS ASHOK CHAWLA, CHAIRMAN, CCI
The man at the helm talks about his new role of overseeing M&As as a regulator and his four-decade long stint in government service
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