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OPINION | ICICI, IL&FS, Sun Pharma, DHFL: Role of the Board of Directors in Questionable Decisions Needs Closer Scrutiny

Now, as the heat turns on India’s second-largest private sector bank and its high-profile ex-MD and CEO Chanda Kochhar, one could be forgiven for thinking that India Inc has a royal mess across its board rooms.

Sindhu Bhattacharya |

Updated:January 31, 2019, 3:35 PM IST
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OPINION | ICICI, IL&FS, Sun Pharma, DHFL: Role of the Board of Directors in Questionable Decisions Needs Closer Scrutiny
File photo of former ICICI Bank CEO Chanda Kochhar. (Reuters)

Investors are having a rough time these days, as some of India Inc stalwarts are breaking out in warts. In the last few months, companies which have traditionally been seen as unshakeable investment bulwarks have started shaking and naming only a few such companies should suffice — IL&FS, Zee, Sun Pharma and DHFL.

Now, as the heat turns on India’s second-largest private sector bank and its high-profile ex-MD and CEO Chanda Kochhar, one could be forgiven for thinking that India Inc has a royal mess across its board rooms.

Let us take the peculiar case of ICICI Bank. In this case, more than other instances, it stands to reason that board rooms should be under intense scrutiny instead of mere individuals. By singling out Ms Kochhar for failing to disclose any conflict of interest while making a large lending decision and recusing herself from that decision-making process, the accusers are only partly right.

There seems to be no indictment of the board of directors who must have also stamped these decisions. The same board, after the skeletons began tumbling out of the Kochhar cupboard, had earlier given a clean chit to their chief. Now, as the decision has been found violating the bank’s own internal code of conduct by an external probe agency and the CBI has launched an independent investigation into the happenings at ICICI Bank, it is a mystery why the bank’s own code was applicable only to Kochhar and not to other members of the board. Did she take a unilateral decision, without informing the board and taking its consent?

In a statement on Wednesday, ICICI Bank quoted the enquiry report by Justice (Retd) BN Srikrishna to announce the sacking of Kochhar. It said Srikrishna concluded that “with the scope period of April 1, 2009 to March 31, 2018 (unless specific information required enquiry into transactions or facts of an earlier period), concluded, primarily on account of ineffectively dealing with conflict of interest and due disclosure or recusal requirements, that Ms Chanda Kochhar was in violation of the ICICI Bank Code of Conduct, its framework for dealing with conflict of interest and fiduciary duties, and in terms of applicable Indian laws, rules and regulations. The enquiry report also concluded that her lack of diligence with respect to annual disclosures as required by the bank in terms of its internal policies, the ICICI Bank Code of Conduct and applicable Indian laws, rules and regulations on her interests (direct or indirect) towards avoidance of conflict of interest, when considered that the bank’s processes were dependent solely on the directors discharging their fiduciary duty to recuse themselves and avoid conflict, implies that the bank’s processes were rendered ineffective by her approach to such disclosures and avoidance of conflict.”

No mention of any role by the board.

As for Kochhar and her individual code of ethics, one knows little of what really prompted her to push loans to a company where she was well aware of perils of non-disclosure of her personal interest. How will Kochhar’s fall from grace affect the country’s second-largest private bank and the image of private banks in India?

The ICICI Bank’s management has been at pains to assure investors that this episode will have no bearing on either the bank’s performance or the performance of its scrip on the bourses. But the Kochhar episode has punched holes in the holier-than-thou image of private sector banks.

Private sector banks have typically been viewed as more competent and healthier than India’s public sector banks. The latest data from RBI shows that private banks’ share in total outstanding bank credit has consistently increased in recent years (although they are yet to surpass PSBs), private sector banks reported a combined profit in 2017-18 against a net loss by public sector banks and private sector banks had a far lower ratio of NPAs (non-performing assets or bad loans) versus advances than PSBs.

In 2017-18, gross NPAs as a percent of gross advances were 4.7 for private sector banks against 14.6 for PSBs. But will they remain paragons of virtue in the public eye now?

JN Gupta, the MD of proxy advisory firm Stakeholders Empowerment Services, said this episode has not necessarily shaken the confidence of investors in India’s private banks. “There would be bad eggs in any system, country or community. Idea should be to identify these bad eggs as soon as possible and bring in remedial measures. Justice (Retd) BN Srikrishna has found Ms Kochhar guilty of procedural lapses. However, she has recourse under law of natural justice notwithstanding this.”

Not just ICICI, at least two other private banks have also seen abrupt changes at the top last year. Rana Kapoor, founder CEO of Yes Bank, was ousted by the industry regulator amid alleged concerns over business practices at his bank. And Shikha Sharma, who was groomed at ICICI Bank before she took up the leadership position at Axis Bank, was also asked to leave amid allegations of wrongdoing at her bank. Private sector banks may not seem so holy anymore, at least no holier than their public sector counterparts.

The skeletons in the banking space have begun tumbling out as the noose over bad loans was being tightened by the sector regulator, the RBI. But in other instances — IL&FS, Sun Pharma, DHFL and Zee — too, where large scale frauds are believed to have taken place need a thorough investigation, regulatory oversight needs to be expanded. And not just into the roles of individuals leading such companies but into the role of each and every member of the board of directors of such companies. Corporate governance across India Inc perhaps needs a trial by fire, and the time is now.

(The author is a senior journalist. Views are personal)

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