Institutional EYE

Commentary on Corporate Governance Issues

Arundhati Bhattacharya’s unfinished agenda at SBI

October 24, 2016

The State Bank of India (SBI) is modernizing itself. It is leveraging technology, improving the quality of disclosures in its annual report, and behaving as any market leader should. But, its ability to become a beacon of good corporate governance is being scuttled by the half-century old State Bank of India Act 1955. IiAS believes Arundhati Bhattacharya must focus on getting the State Bank of India Act 1955 changed so that public shareholders enjoy their rights as shareholders in any other company. If she can orchestrate this, it may well become her enduring legacy.

 

 

State Bank of India, in its current structure, was formed under The State Bank of India Act 1955 (SBI Act). For entities that have been created under a special act of Parliament, parliamentary fiat may be germane to their creation: but these Acts overrule all other applicable regulations. This implies that if there are progressive changes that SEBI or any other regulator makes for listed companies, SBI need not follow them. But, SBI is listed and is accountable to public (or, non government) shareholders. It must no longer be allowed to operate in isolation.

 

The SBI Act has been selectively modified over the past half century. In not making the changes that allow public shareholders to assert their rights, SBI continues to be governed in its own uncharacteristic manner.

 

IiAS believes that SBI must set the tone for others to follow – it must strive to be ahead of others on the corporate governance agenda.

 

E-voting: a necessity

n an age where the Prime Minister Modi’s goal is to build a ‘Digital India’, SBI’s stance of not providing e-voting is incomprehensible. The SBI Act allows for votes to be taken either by show of hands or by a poll. This is draconian: SBI cannot even issue a postal ballot, and e-voting remains a far cry.

 

Beyond the ease of voting that an e-voting facility provides, it changes the way votes are counted. It is the equivalent of a poll – each share carries a vote (unlike the show of hands method where every individual accounts for just one vote independent of their shareholding). This is an important shift, since decisions will be weighed by those that matter, rather than those have the time to attend a general meeting.

 

Dividends and auditor appointment: ignoring the shareholder vote

Shareholders of SBI do not vote on dividends. Dividends are subject to RBI’s guidelines, but require only a board approval. Similarly, auditor appointments in SBI (and all other public sector banks, for that matter) do not require shareholder approval. While this is not to suggest that IiAS is concerned over SBI’s dividend payout levels or its auditor appointments, not providing shareholders an opportunity to vote on such matters is an infringement of basic shareholder rights.

 

The board: not so independent

SBI’s board does not need to have independent directors. At best, it is required to have four shareholder directors that may be classified as independent – since they are supposed to protect the interest of minority shareholders and are not beholden to the majority shareholder. Even with this classification, SBI’s 14- member board remains imbalanced – allowing SBI’s executive directors an almost free reign.

 

Mergers and acquisitions: grievance redressal, but no voting rights

Mergers and acquisitions can change the nature and complexity of an existing business. Such transactions may also affect ownership, as issue of shares for consideration could dilute existing shareholders. Therefore, shareholders must have a right to vote on such transactions. Not only is this a basic requirement of good corporate governance, but also an apposite right of ownership. SBI denies its shareholders these rights. Under the SBI Act, shareholders can only voice their objections – a ‘grievance redressal mechanism’ will decide whether these concerns have merit.

 

The lack of voting rights has come into considerable debate recently: in August 2016, SBI decided to merge its subsidiaries and the Bhartiya Mahila Bank with itself. The decision was long awaited and did not surprise the market. However, shareholders of some subsidiaries believed the share swap ratio was unfair to their interests. Their inability to vote on the transactions is a violation of corporate democracy.

 

Calling for a shareholder meeting: it takes about Rs.400bn

hareholders can requisition a meeting only if they own at least 20% of SBI’s equity – which, at current market value, aggregates about Rs.400bn in equity value. Admittedly, the 10% threshold set by Companies Act 2013 is also high – but at a 20% threshold, it is virtually impossible for any investor to requisition a meeting.

 

Thresholds to requisition meetings must be lowered. Starboard Value LLP, which owned less than 5% of Yahoo, managed to get four board seats and then compel the company to sell its core business to Verizon. This is the degree of empowerment shareholder need.

 

One step forward and one step back

nder Arundhati Bhattacharya’s leadership, SBI has done what was in its control. The bank has embraced technology, morphed itself to become more suitable to the current generation, and is doing what most organizations are expected to – be a good corporate citizen, be transparent and communicate with investors.

 

But, SBI’s corporate governance standards are being quelled by the SBI Act, which refuses to modernize itself. It is now incumbent upon Arundhati Bhattacharya, during her extended term, to release SBI from the clutches of its own charter. She needs to engage the government and even Parliament if needed, to make the required changes – this will be an enduring impact on SBI’s shareholders and may well be her lasting legacy.

 

For the full report, click here.

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