What changed
RBI issued a circular on April 26, 2021, revising governance norms for private sector banks, SFBs, and foreign bank subsidiaries. Key changes include: board chair must be an independent director; board quorum set at one-third of strength or three directors (whichever higher) with at least half independent directors; Audit Committee (ACB) must have only non-executive directors (NEDs) and chair cannot be board chair or member of credit sanction committee; Risk Management Committee (RMCB) must have majority NEDs and chair cannot be board chair; Nomination and Remuneration Committee (NRC) must have only NEDs. These rules override prior RBI instructions.
What it means for you
Banks must immediately review and reconstitute their board and committee structures to comply with stricter independence and quorum requirements. The chairperson role is now reserved for independent directors, reducing promoter influence. Committees like ACB, RMCB, and NRC face tighter composition rules, potentially requiring new appointments or resignations. Non-compliance could attract regulatory scrutiny.
What you must do
- Ensure board chair is an independent director; if not, initiate transition immediately.
- Review board quorum: one-third of total strength or three directors (whichever higher) with at least half independent directors present.
- Reconstitute Audit Committee (ACB) with only NEDs; chair must be independent and not on any credit sanction committee.
- Reconstitute Risk Management Committee (RMCB) with majority NEDs; chair must be independent and not board chair.
- Reconstitute Nomination and Remuneration Committee (NRC) with only NEDs; at least half members attending must be independent directors.
Who it affects
Private Sector Banks, Small Finance Banks (SFBs), Wholly owned subsidiaries of Foreign Banks, State Bank of India and Nationalised Banks (where not inconsistent with their statutes), Local Area Banks, Payments Banks, and Regional Rural Banks (applicability to be notified separately)
Does this circular apply to foreign banks operating as branches in India?
No, the circular explicitly states it is not applicable to foreign banks operating as branches in India.
What is the quorum requirement for board meetings under the new rules?
The quorum for board meetings is one-third of the total strength of the board or three directors, whichever is higher. Additionally, at least half of the directors attending must be independent directors.
Can the board chair also serve as chair of the Audit Committee?
No, the board chair cannot be a member of the Audit Committee (ACB). The ACB must be chaired by an independent director who does not chair any other committee of the board.