Corporate governance: SBI weighed down by its own laws, says IiAS

The immediate reaction from Institutional Investor Advisory Services (IiAS) is the invite that SBI has sent out to shareholders for an EGM on June 17 amidst COVID-19 pandemic, as the State Bank of India Act of 1955, which created it, does not envisage or allow it to hold the extra-ordinary general meeting digitally/electronically or even an e-voting.

An investor advisory has blasted the corporate governance practices at State Bank of India, saying the nation's largest lender is weighed down by its own laws which mostly overrule all other regulations, making a mockery of the rights of public shareholders.

The immediate reaction from Institutional Investor Advisory Services (IiAS) is the invite that SBI has sent out to shareholders for an EGM on June 17 amidst COVID-19 pandemic, as the State Bank of India Act of 1955, which created it, does not envisage or allow it to hold the extra-ordinary general meeting digitally/electronically or even an e-voting.

"SBI's ability to become a beacon of good corporate governance is being scuttled by the half-century old State Bank Act, 1955. It is compelled to hold a physical EGM on June 16 at a time when the COVID-19 pandemic is raging," IiAS says in a note, calling up on the board to advise government to amend the SBI Act.

Stating that SBI shareholders have lesser rights compared to shareholders of other companies, it notes that "SBI continues to be governed in a quaint manner" by not making the changes that allow public shareholders to assert their rights, even though the SBI Act has been modified over the past half century, "but the investors have not been allowed inside the tent".

The public own around 20 percent of SBI valued at Rs 27,300 crore.

"The SBI Act ensures that all the progressive changes that Sebi or any other regulator makes for listed companies, SBI need not follow them even though a listed company it's accountable to its public shareholders and therefore should not be allowed to operate in isolation," it says, adding SBI board must advise government to ensure that public shareholders enjoy the same rights as in any other listed company.

It can be noted that the SBI Act allows for votes to be taken either by show of hands or by a poll. It cannot even issue a postal ballot, cannot allow e-voting, and holding a virtual meeting remains a far cry.

"But these are relics of the past ages. Beyond the convenience an e-voting facility provides, it importantly changes the way votes are counted and called for e-voting also given the times we are in.

"E-voting can be an important shift, since the decisions will be weighed by actual shareholding, not by those that have the time to attend a general meeting," it said.

State Bank called for a public gathering of its shareholders at its auditorium here on June 17 despite the corporate affairs ministry allowing all other listed companies to hold virtual meetings due to the lockdown.

"This is because SBI is weighed down by a Luddite Act that doesn't provide for such a meeting.. and the EGM may pose an unnecessary risk to the health and safety of shareholders and senior management," says IiAS.

There are also other provisions of the SBI Act that have left shareholders irate in the past. It can be noted that SBI shareholders do not vote on dividends, which are subject to the RBI guidelines and require only board nod. Again like other state-owned banks, SBI does not need shareholders' approval to appoint auditors.

SBI's board structure is defined in the SBI Act: it is required to have a chairperson and a vice-chairperson, two managing directors, one employee representative director, up to six directors (minimum two) having special knowledge of the working of co-operative institutions and of rural economy or experience in commerce, industry, banking or finance and four shareholder directors. An RBI nominee and the government too is a must.

IiAS also questions the independence of the board, which according to the SBI Act, other than the shareholder directors, all board members need the government approval, raising legitimate questions about the board's ability to distance itself from the government agenda and run the bank independently because the interest of the largest shareholder and that of the entity are not always aligned.

Similarly, SBI shareholders have not say on or a right to vote on mergers and acquisitions -- shareholders can only voice their objections and the grievance redressal mechanism will decide whether these concerns have merit.

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