The Group notes that the effectiveness of the Boards largely depends upon the flow of information to and from the Board. The information furnished to the Board should be wholesome and complete and should be adequate to take meaningful decisions. A distinction needs to be made between statutory items and strategic issues in order to make the material for directors 'manageable'. In this context, the Group reviewed the practices of banks and financial institutions in regard to preparation of the agenda notes, recording of the proceedings of the meeting of the Board, follow up of various action points arising from the decision taken at the meetings, etc. The Group noted that the manner in which the proceedings are recorded and followed up in public sector banks leave much scope for improvement.

An issue that was brought to the notice of the Group was the number of reviews put up to the Board as per the Calendar of Reviews prescribed by the Reserve Bank of India. It is was pointed out that the large number of reviews put up to the Board leaves little time to the Board for fruitful discussions on future business strategies and policies. The Group recommends that the Reviews dealing with various performance areas could be put to the Supervisory Committee of Board and a summary on each of the reviews could be put up to the Main Board. The Board's focus should be more on strategy issues, risk profile, internal control systems, overall performance of the bank, etc.

The Group is of the view that the procedure followed for recording of the minutes of the Board meetings in banks and financial institutions should be uniform and formalised. The Group would suggest that banks and financial institutions may adopt two methods for recording the proceedings: A summary of key observations made which should be submitted to the next Board meeting and a more detailed recording of the proceedings which will clearly bring out the observations, dissents, etc. made by the individual directors could be forwarded to them for their confirmation.

The Group is of the view that the draft minutes of the meeting should be forwarded to the directors, preferably via the electronic media, within 48 hours of the meeting and ratification obtained from the directors within a definite time frame. If a director fails to respond within the time specified, it should be taken that he / she has no comments to offer.

In every Board meeting, the Board should review the status of the action taken on the points arising from the earlier meetings and till action is completed to the satisfaction of the Board, any pending item should continue to be put up before the Board.

The Group noted that the public sector banks do not have a qualified Company Secretary on their rolls. A Company Secretary has important fiduciary and Company Law responsibilities. The Company Secretary is the nodal point for the Board to get feedback on the status of compliance by the organisation in regard to provisions of the Company Law, Listing Agreements, SEBI Regulations, Shareholder grievances, etc.

The Public Sector banks historically had no qualified Company Secretary.

In the context of a number of banks in the public sector accessing the capital market, the Group is of the view that there is now a need to have a qualified Company Secretary in order to ensure that the bank is in compliance at all times with the company law related issues as also to be instrumental in redressing grievances of the investors. A qualified Company Secretary, according to the Group, would also fulfil the earlier recommendation in regard to recordings of the proceedings of the meetings of the Board and its Committees. The Group recommends that all banks should consider appointing qualified Company Secretary as the Secretary to the Board and have a Compliance Officer ( reporting to the Secretary) for ensuring compliance with various regulatory / accounting requirements. Further, the Institute of Company Secretaries of India may be required to include appropriate inputs in their curriculum as part of the professional examination.

1. Supervisory Committee: An issue raised during the deliberations of the Group was whether an additional tier by way of Supervisory Board could be considered for banks, a practice which is followed by banks in Germany. The Supervisory Boards of banks in Germany mainly function as "Executive Committees" of the Board. The public sector banks in India have constituted "Executive Committee" or "Management Committee" which meet more frequently than the full Board do. The Group is of the view that instead of creating another tier by way of a Supervisory Board, there could be a Supervisory Committee of the Board in all banks - be they public or private sector, which will work on collective trust and at the same time, without diluting the overall responsibility of the Board. The role and responsibilities of the Supervisory Committee of the Board could include monitoring of the exposures (both credit and investment) by the banks, review of the adequacy of the risk management process and upgradation thereof, internal control systems and ensuring compliance with the statutory / regulatory framework.

2. Audit Committee of the Board: The Group notes that banks have set up as required in terms of the RBI guidelines, independent Audit Committees. The Audit Committee comprises a majority of the independent / non-executive directors with the Executive Director of the bank as one of the members. The Group notes that a Chartered Accountant, wherever available on the board, is a member of the Audit Committee.

   The international best practice in this regard is to constitute Audit Committees with only independent / non-executive directors. As regards the composition of the Audit Committee, the Basel Committee has suggested that in order to ensure its independence, the Audit Committee of the Board should be constituted with external Board members who have banking or financial expertise. (cf Enhancing Corporate Governance for Banking Organisations, Basel, September 1999). The Group is of the view that ideally the Audit Committee should be constituted with independent / non-executive directors and the Executive Director should only be a permanent invitee. However, keeping in view that the present circumstances, the existing arrangements where the Executive Director is one of the members may continue; and may include the Executive Director and official directors i.e., nominee of Government of India and RBI in respect of public sector banks.

   The Group is of view that the Chairman of Audit Committee need not be confined to the Chartered accountant profession but can be a person with knowledge of 'finance' or 'banking' so as to provide directions and guidance to the Audit Committee since the Committee not only looks at accounting role but also the overall management audit etc. of the bank.

3. Nomination Committee: As already discussed in the paragraph 4.8, the Group is of the view that it is desirable to have a Nomination Committee for appointing independent / non-executive directors of banks that should scrutinise the nominations received for nomination of independent / non-executive directors with reference to their qualifications, experience and other criteria proposed above. The Group recognises that in the case of public sector banks, the nomination committees may be of not immediate relevance, since the independent / non-executive directors (except shareholder nominees in the case of banks which have issued capital to the public) are appointed by the Central Government. The Group is of the view that in the context of a number of public sector banks issuing capital to the public, a Nomination Committee of the Board may be formed for nomination of directors representing shareholders.

4. Shareholders' Redressal Committee: Since banks are increasingly accessing capital market, there is a need for an effective machinery for redressal of investor grievances in banks. The Group notes that as of now, the matters relating to investor complaints, etc. are looked after by the line staff. With a view to building up credibility among the investor class, the Group recommends that a Committee of the Board may be set up to look into the grievances of investors and share holders, with the Company Secretary as a nodal point.

5. Risk Management Committee: The Group notes that in pursuance of the Guidelines issued by the Reserve Bank of India, every banking organisation is required to set up Risk Management Committees (for management of both credit risk and market risk) with Board level representation to manage effectively the risk profile of the bank. The management of risk particularly arising from over exposure to interconnected entities, came to the fore in the recent past in respect of a few banks. The Group, therefore, recommends that the formation and operationalisation of the Risk Management Committees should be speeded up and their role further strengthened.

The Group notes that disclosure requirements for banks have been substantially enhanced in the recent period. Banks are now required to disclose in the 'Notes on Accounts', exposure to sensitive sectors as also exposure to capital market by way of -

1. direct investment in shares and debentures,

2. advances against shares and debentures and

3. guarantees issued on behalf of stockbrokers.

The Group suggests that it would be desirable if the exposure of a bank to stockbrokers and market makers as a group, as also exposure to other sensitive sectors (viz., real estate), exposure to various sectors, etc. are reported to the Board regularly.

The Group recommends that the following disclosures be made by banks to the board of directors at regular intervals as may be prescribed by the board from time to time:

1. The progress made in putting in place a progressive risk management system, the risk management policy and strategy followed by the bank.

2. Exposure to related entities, viz., details of lending to / investment in subsidiaries, the asset classification of such lendings / investment, etc.

3. Conformity with Corporate Governance standards - structure, various committees, etc.

For implementation of the recommendations made above, the Group suggests the following approach for adoption: The banks could be asked to come up with a strategy for implementation of the governance standards recommended. Once the strategy is received from all banks, the progress of implementation could be reviewed after a period of twelve months. Thereafter, the position could be reviewed half-yearly or annually, as deemed appropriate.