Overview of the Forex Liability Accounting Fiasco at IndusInd Bank

The forex liability accounting issue involving IndusInd Bank has garnered significant attention. Recently, the reappointment of the bank’s managing director (MD) was approved for one year, conflicting with the requested three-year term.

• The bank previously faced a similar situation where a three-year tenure request was reduced to two years.
• The rationale behind approving short tenures, despite candidates being deemed unsuitable for longer terms, remains unclear.

Similar Instances in Other Banks

In 2023, Kotak Mahindra Bank's MD resigned, leading to an interim MD appointment for four months, which was approved for only two months initially.

• This necessitated another request for an extension for the remaining term, showcasing regulatory indecision.

Regulatory Practices by SEBI and IRDAI

Other regulators like Securities and Exchange Board of India (SEBI) and Insurance Regulatory and Development Authority of India (IRDAI) follow similarly extensive protocols for MD appointments.

• Entities must propose suitable candidates well before vacancies occur.
• This process often results in prolonged periods without an MD, sometimes extending up to six months.

Regulatory Control Over Appointments

Regulators have increased control over appointments, from rejecting candidate panels to curtailing tenures and altering remunerations.

• They also approve key appointments like chairpersons, CEOs, and independent directors in private sector entities.
• SEBI has recently withdrawn a proposal to extend oversight to other key managerial roles.

Private vs. Public Sector Appointments

There is a distinct difference in regulatory oversight between private and public sector entities.

• The government reported 42% of director positions in public sector banks are vacant due to bureaucratic approval processes.
• Unlike private entities, public sector bank appointments do not require approval from the RBI/IRDAI.

Implications and Criticism

The extensive involvement of regulators raises questions about their effectiveness, as seen in IndusInd Bank's case despite the forex fiasco.

• This involvement creates a false perception of adequate governance and may expose regulators to liability for governance lapses.

Fit and Proper Test

Regulators have established the "fit and proper" test to ensure integrity and trust in financial institutions.

• This test includes vetting for qualities like honesty, ethical behavior, and the absence of disqualifications.

Consequences of Regulatory Involvement

Increased regulatory involvement in appointments has unintended consequences, including leadership uncertainty and potential moral hazards.

• It paradoxically requires regulators to act against individuals they recently approved.
• Talent drain is a significant issue, with professionals reluctant to join heavily regulated entities.

Call for Deregulation

The need for a balanced approach is emphasized, where regulated entities operate independently yet are subject to regulatory oversight.

• Boards and management should be accountable for governance failures, attracting penalties to ensure stability.