Private bank chiefs to stay in office till age of 70
The Reserve Bank has ended the suspense on the age limit for private sector bank chief executives, bringing relief for investors in HDFC Bank and IndusInd Bank, who might have been worried about the fate of their rock star chiefs who have delivered enormous returns in the past few years. Full-time directors of private banks can now continue up to the age of 70, in line with the latest Companies Act.
The bank boards will, however, retain the right to set a lower retirement age for officials, said RBI on Tuesday. One consequence of RBI’s clarification might be that second-rung leaders in some of these banks could begin to look for greener pastures as their leadership opportunities will diminish, with many current CEOs likely to continue at least for another five years.
“It has been decided that the upper age limit for MD & CEO and other WTDs (whole-time directors) of banks in the private sector should be 70 years, i.e.- beyond which nobody should continue in the post,” said a notification from RBI.
“Within the overall limit of 70 years, individual bank’s boards are free to prescribe a lower retirement age for the WTDs, including the MD & CEO, as an internal policy.” IndusInd and HDFC Bank will be the immediate beneficiaries with the terms of Aditya Puri at HDFC Bank, and Romesh Sobti’s at IndusInd coming to an end next year. Puri is 64, and Sobti is 65. Neither Puri nor Sobti could be reached for comments.
HDFC Bank, headed by Puri since its inception in 1994, is now the most valuable bank with a market capitalisation of more than Rs 2 lakh crore. Sobti, who moved to IndusInd in 2005 when the market value was about Rs 1,000 crore, has transformed it into a company worth Rs 33,000 crore.
Among other CEOs, ICICI Bank’s Chanda Kochhar and Axis Bank’s Shikha Sharma could have as many as 14 years if their boards decide
to retain them up to the maximum age limit of 70. Some market participants felt the move was retrograde.
“It’s too early to comment. There was no need for RBI to increase the retirement age as globally banks are run by young CEOs in their 50s,” said a fund manager of a leading fund house. “Historically, there were no such instances where stocks declined when CEOs of any bank changed.”
Under Governor Raghuram Rajan, RBI has been re-drafting various rules, in the process throwing out archaic regulations. Rajan has been advocating longer tenures for the chairmen of state run banks as terms of five years or more would enable them to provide the lenders with a clear vision and strategy. He has suggested amending laws to enable PSU banks to hire chiefs from outside so that merit remains the top priority in naming CEOs.
“The boards need to be beefed up to be as effective as possible, which means strengthening quality of people they attract and also improving board power as an oversight over management,” Rajan told reporters recently. “You need managing directors for longer terms — some come for eight months and that’s too short.”
While RBI can decide on what can be done at private banks since they are governed by the Companies Act, Parliament has to amend the Bank Nationalisation Act to enable similar provisions for state-run banks.
Before Tuesday’s notification, HDFC Bank and IndusInd had been busy planning succession. Paresh Sukthankar, one of the founder-members of HDFC Bank, was promoted to deputy managing director last fiscal year, which investors read as a signal that he could succeed Puri.
IndusInd’s Sobti had said his successor could be an internal candidate. “The succession planning has been happening for the past six years,” Sobti told ET in February.
“I don’t determine my successor. It is the prerogative of the nomination committee. I will be consulted and I will certainly give them my balanced view. I will give them not one, but three names. The board has the right to go external also, but I would always give the internal candidates priority because of continuity of approach.