Corporate governance lessons from IDBI-LIC deal and ICICI Bank

Two recent events in the financial sector offer many corporate governance lessons. In one case, the government and its agencies were involved and left behind questionable precedents. In another private sector institution, a former government employee is involved though the manner of his involvement raises questions. These events are juxtaposed with larger societal questions related to saving institutions and jobs and ensuring financial stability.

The first example relates to the government’s decision to sell its stake in IDBI Bank to the Life Insurance Corp. of India (LIC). IDBI Bank’s non-performing assets (NPAs) have been mounting, as have been its losses. Its capital adequacy barely meets the regulatory benchmarks. In short, the bank is floundering without a visible lifeline. The government, as the largest shareholder, provided one tranche of capital infusion but clearly that was not enough.

Thereafter, the government was faced with three choices. One, to provide more capital. But the government’s kitty is limited and must deal with competing claims. Two, it could extinguish the legal entity by either merging it with a stronger public sector bank or shutting it down. The former option involves consciously infecting another public sector bank with IDBI’s bugs. Shutting it down, on the other hand, is a political risk in a pre-election year. Three, the government could sell it off, but no private sector bank would want to risk it. The next best solution: force-feed it to another public sector entity which cannot say no to the government.

Enter LIC, the government’s preferred sick bay for ailing public sector banks, especially those which the government does not want to (or cannot) recapitalize, downsize or shut down. The transaction raises multiple questions about acceptable corporate governance norms.

First, how did LIC get the money to pay the government for its stake in IDBI Bank? Any money it pays out has to be from policyholders’ funds, or the premium they pay to the insurance company every so often. Ideally, any excess money belongs to policyholders and must be returned to them after deducting expenses and provisions. This then raises ethical questions: are the funds invested in IDBI Bank sourced from the surplus which should have been returned to policyholders but has now been diverted? Also, theoretically, LIC’s investment in IDBI Bank breaches the investment mandate approved by government and regulator.

The other issue is the regulator’s discretionary powers. The Insurance Regulatory and Development Authority (IRDAI) seems to have approved the IDBI-LIC deal in record time. In most other cases, IRDAI takes its time in assessing risks to policyholders and the impact any proposed deal is likely to have on the industry and its stability. The speed at which the IDBI-LIC deal was approved seems to indicate that an inherent hierarchical priority has been superimposed over the regulator’s approval process, which accords undue urgency to deals involving the government. This is a dangerous precedent.

It can be argued that saving the bank is part of the sovereign’s social and moral contract: It is duty-bound to ensure financial stability (which includes safety of depositors’ money), save jobs and make all efforts to ensure asset turnaround. And, the argument goes, the government can circumvent some of the rules for this purpose.

Focusing on asset turnaround is also the philosophical keystone for the current bankruptcy and resolution process. The Committee Report on Resolution of Stressed Assets, or Sashakt, also echoes similar values. If we consider IDBI Bank to be a stressed asset, then its resolution process contradicts some of the committee’s suggestions: transparent market-based solution, free from government intervention, paradigm shift in governance and risk process.

The second example where corporate governance questions arise relate to ICICI Bank and the raging debate over the board’s embarrassing flip-flops. The same board seems to have now waded into deeper, murkier waters in their attempts to ameliorate the early situation.

The board belatedly, and probably under pressure, has agreed to an independent probe into allegations of impropriety by chief executive Chanda Kochhar, who is on leave till the enquiry is complete. Thereafter, the board’s process for selecting a new chief operating officer (COO) designate in Sandeep Bakhshi seemed as arbitrary and opaque. Interestingly, the press release announcing the board’s decision to appoint Bakhshi as COO includes an intriguing statement: “Mr Bakhshi will report to Ms Chanda Kochhar, who will continue in her role as MD & CEO of ICICI Bank...During her period of leave, the COO will report to the Board.” If Bakhshi has to report to Kochhar for the next five years, assuming she gets a clean chit, how much discretion and independence will he exercise now?

That brings us to the new chairman. Former bureaucrat Girish Chaturvedi has been appointed as the new chairman though it is unclear how the selection was made. Was there any government intervention? The ICICI Bank board is yet to share the processes it adopted for selecting Chaturvedi. There are also news reports of Chaturvedi and Bakshi having interacted earlier—as insurance secretary and chief executive officer (CEO) of ICICI Lombard, respectively. While it is good for any company to have the CEO and chairman acting in harmony, it is also true that too much familiarity breeds multiple evils, especially of the corporate governance type.