An internal fight: For RBI, now it's board vs executive management

The sovereign is the supreme and the government is its executive agent. One must appreciate the autonomy of the Indian central bank in that context. Period. Also, its board has the power to shift from its traditional advisory role to a more active supervisory role. Period.

 

The board draws the power from two sections of the Reserve Bank of India (RBI) Act.

 

Section 7 (2) says, “subject to any such directions, the general superintendence and direction of the affairs and business of the Bank shall be entrusted to a Central Board of Directors which may exercise all powers and do all acts and things which may be exercised or done by the Bank.”

 

And, Section 58 (1) says, “the Central Board may, with the previous sanction of the 1[Central Government], 2[by notification in the Official Gazette,] make regulations consistent with this Act to provide for all matters for which provision is necessary or convenient for the purpose of giving effect to the provisions of this Act.”

 

This section also says, every regulation made by the central board should be forwarded to the central government and a copy of the regulation must be laid before both the Houses of Parliament within 30 days.

 

What's more, the government can also call for a Comptroller and Auditor General (CAG) audit of the RBI books. Section 51 of the RBI Act allows appointment of special auditors by the government. “Without prejudice to anything contained in section 50, the 1[Central Government] may at any time appoint the 2[Comptroller and Auditor General] 3[***] to examine and report upon the accounts of the Bank.”

 

If the last two meetings are any indication, from now on, the RBI board will play a more active role. And, there is nothing wrong in it.

 

Technically, the board can have 21 directors, including the governor and four deputy governors, two government nominees, four from RBI’s local boards and 10 appointed by the government. Till 2011, there was only one government nominee; one more was added after the Factoring Regulation Act 2011 came into being.

 

Incidentally, unlike companies, the concept of independent director does not exist in the RBI Act. Anyway, it is a “legal fiction” as a truly independent director can only come from Mars.

 

Who can be an RBI director? There is no explicit qualification for a director. There are disqualifications though — a government employee, an insolvent person, someone attached to a bank and a mentally challenged person cannot be on the RBI board.

 

Four deputy governors and two government nominees do not have voting rights; in the case of a tie, the governor has the casting vote. In RBI’s history, no resolution has been put to vote ever.

 

The board is expected to meet six times a year. A committee of the central board, consisting of the governor and deputy governors and at least one other director, is expected to meet every week to “transact” “current business”. I understand this committee discusses issues through a close loop blog every week and meets once in a month.

 

The last two meetings of the RBI suggest the sovereign is following the Act in toto and none can find fault with it. This also marks a strategic shift in the government’s approach to handling the central bank’s autonomy. Till now, the governor — typically a finance ministry bureaucrat; the last instance was D Subbarao — has been perceived to be a Trojan horse who would work on behalf of the government. (It is another matter that one never worked that way.) Now, some of the board members are being turned into a Trojan horse and unlike the governor, they are not expected to change their allegiance.

 

The turf has also been shifted. The fight between the finance ministry and the RBI is being replaced with the skirmishes between the RBI board and its executive management.

 

The RBI management must respect the board and work in close coordination, but do we have the right kind of people on the board to guide and supervise the activities of the central bank in the world’s sixth-largest economy?

 

Who am I to question this? In a democracy, peoples’ representatives in Parliament should have the last word in choosing the directors. Period.

 

Still, in the new regime — where RBI governor is the CEO and the board is supreme — we may have to make certain changes to make this effective.

 

For instance, should the governor’s position be made constitutional like that of CAG and judges of Supreme Court and high courts who can be removed only by two-thirds majority in both Houses of Parliament?

 

Should the search committee for the governor include the leader of the Opposition as well?

 

Should 50 per cent of the board members be co-opted by the board itself instead of being picked up by the government?

 

Unless these issues are addressed, there will be uneasy calm but the RBI-government relationship will never be the same again.


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