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A failure of governance

Why we need to go through the timeline of the uncalled-for drama at ICICI Bank

Finally, finally, the board of ICICI Bank has ordered a probe into allegations levelled against its CEO, Chanda Kochhar. Does this call for a celebration? No, it doesn’t. The probe comes rather late in the day. And the board is having to refer the matter to an outsider only because of its own inadequate response to the initial set of charges made nearly two years ago. These constitute lapses in governance at a bank that has been characterised as “systemically important” by the regulator.

On May 30, the board of directors of ICICI Bank announced that it had ordered an inquiry by an outsider into allegations made by a whistle-blower. These allegations are not to be confused with the ones made by an investor, Arvind Gupta, in 2016. Mr. Gupta had then written to the Prime Minister, with copies to the Governor of the Reserve Bank of India and the Chairperson of the Securities and Exchange Board of India (SEBI), among others.

The publication of Mr. Gupta’s allegations in a newspaper in March this year raised a storm. On March 28, the Chairman of ICICI Bank’s Board, M.K. Sharma, issued a statement expressing the board’s full confidence in Ms. Kochhar. In April, media reports said that Mr. Sharma had carried out an internal inquiry in 2016 itself and had found no evidence of wrongdoing on Ms. Kochhar’s part. End of story, or so the ICICI Bank board would have liked.

However, the controversy would not die down. Investors and media analysts have been relentlessly pressing the board for a better response. Following charges made by a whistle-blower, the board has now authorised the chairman of the Audit Committee to select an appropriate person to head an independent probe.

Sharp questions

Three questions arise. First, after having stood steadfastly by its CEO for over two months, why has the board opted for a probe now? Second, is a probe by an outsider required at all? Third, should Ms. Kochhar continue in office during the period of the inquiry?

The decision to go in for a probe is clearly prompted by widespread dissatisfaction with the clean chit given by the Chairman last March. It is also possible that the board has been rattled by show-cause notices issued by SEBI on May 24. According to media reports, the notices relate to alleged violation of disclosure requirements on the part of both Ms. Kochhar and ICICI Bank. If the violations are established, the bank could be subject to monetary penalties and the associated reputational damage.

However, the key question, as one veteran banker pointed out to me, is whether an inquiry conducted by an outsider is at all necessary in such a case. Let us recount the salient facts in brief. In April 2012, ICICI Bank made a loan of ₹3,250 crore to the Videocon group. Ms. Kochhar was the bank’s CEO at the time. Mr. Gupta’s letter to the PM had said that Ms. Kochhar’s husband had had a business partnership with the Videocon group prior to the sanction of the ICICI loan. There would thus be a clear conflict of interest in Ms. Kochhar being party to the sanction of a loan to Videocon.

The issue at the heart of the controversy is simple enough: did Ms. Kochhar disclose the conflict of interest to the board and recuse herself from all matters concerning Videocon? If she did not do so, it is sufficient ground for the board to ask Ms. Kochhar to step down as CEO.

A lapse

It is not necessary to establish a quid pro quo in the relationship for the board to decide whether Ms. Kochhar should step down. That is a separate matter to be pursued by the law enforcement authorities. Non-disclosure of conflict of interest and non-recusal are grave enough lapses. The line that various people, including government officials, have been putting out — “let us await the outcome of investigations” — is sheer evasion.

No deep probe, no forensic analysis, no great legal expertise is required to answer the elementary question posed above. The board of directors is perfectly competent to answer it by having the relevant documents placed before it. That is what the board should have done in March when the controversy erupted. The drama that has unfolded since is uncalled for and could have been avoided if only the board had done the right thing earlier.

Some of the other arguments made in defence of the CEO amount to a red herring drawn by interested parties. For instance, Mr. Sharma has defended Ms. Kochhar on the ground that ICICI Bank had assumed a share of only 10% of the total loan given by a consortium of banks and the loan itself had been made in accordance with the bank’s norms. This does not wash. It is not that a conflict of interest arises only when a loan is made in violation of norms; the conflict does not go away even when the loan decision is in conformity with norms.

The conflict of interest does not end with the sanction of a loan. It extends to post-loan monitoring and the readiness of the lender to exit a relationship where problems are brewing. It applies also to recognition of a loan as a non-performing asset and steps taken to effect recovery. It was incumbent on Ms. Kochhar to have distanced herself from all matters related to Videocon.

When a fresh set of allegations surfaced this month, the board must have been in a bind. Since it had solidly backed its CEO thus far, any probe it chose to conduct by itself would have lacked credibility. Perhaps, that is why the board has opted to entrust the probe to an outsider. It may well be that the whistle-blower has raised issues other than the loan to Videocon. However, it’s hard to believe that any issue of impropriety is beyond the competence of a board. The board can always seek the assistance of outside experts where required. The resort to an outsider is a situation of the board’s own making.

Now that the board has decided to have a comprehensive probe, one that could stretch over several weeks or months, Ms. Kochhar’s status during the period is an important issue. The board has denied having asked Ms. Kochhar to go on leave. It has said that her current leave had been planned in the normal course.

Tenuous arrangement

Does this mean that she will continue to helm the company on her return from leave? If yes, it is a highly unsatisfactory state of affairs. Just think of the plight of those reporting to Ms. Kochhar and the morale in the organisation in general when its CEO is the subject of an extended probe. The correct and proper course would be to ask Ms. Kochhar to step down as CEO until the probe is completed.

The board has also denied that it has set up a search committee to find a successor to Ms. Kochhar. It is free not to set up one. But the board is certainly bound by regulations to have a succession plan in place. The board must ensure that it has a choice of candidates it can turn to in the event that Ms. Kochhar is required to step down.

It is not merely the Chairman and independent directors of ICICI Bank who have been found wanting in the controversy. The nominee of the government and the LIC nominee on the board too have been coy about getting a straight answer to the question of conflict of interest involved in this case. They have chosen to stay away from meetings where they had a fiduciary obligation to attend and pose the hard questions. Such behaviour is strange, to say the least, and it completes the story of a breakdown in governance at the bank. As one distinguished banker put it to me, “Would the government have shown the same indulgence to the CEO of a public sector bank?”

T.T. Ram Mohan is a professor at IIM Ahmedabad. E-mail: ttr@iima.ac.in Disclosure: The writer is on the board of IndusInd Bank. The views expressed are personal

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Printable version | Jul 6, 2020 8:22:25 PM | https://www.thehindu.com/opinion/lead/a-failure-of-governance/article24090218.ece

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