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Following are the sections under Banking Regulation Act,1949 which relates to appointment of Chairman, Managing Director and Whole Time Director and which are made applicable to Co-operative Banks including UCBs.

Section10. Prohibition of employment of Managing Agents and restrictions on certain forms of employment

Section 10B. Co-operative Bank to be managed by whole time Chairman

Section 10BB. Power of Reserve Bank to appoint Chairman of the Board of Directors appointed on a whole-time basis or a Managing Director of a co-operative bank

Section 35B – Amendments of provisions relating to appointments of Managing Directors, etc., to be subject to previous approval of the Reserve Bank

Section 36AA. Power of Reserve Bank to remove managerial and other persons from office

In terms of powers conferred under these various sections, RBI has issued direction relating to appointment of Managing Directors/Whole Time Director (MD/WTD)

Para 3.2 of the direction relating to appointment of MD/WTD dated 25^th June 2021 reads as follows

If a UCB decides to appoint Whole-Time Director (WTD), who may also be designated as Executive Director or by any other name, the need for such an appointment may be decided by the bank keeping in view the growth in business, expansion of activities, geographical footprints and organisational vision for growth in the medium and long term. The creation of the post of WTD and the functions that can be performed may be decided by the BoD and approved by the General Body of the bank. The WTD shall report to the Managing Director.

Since the concept of whole time director is new to UCBs,there appears to be some doubts as to whether UCBs should appoint WTDs.For a better understanding of the concept of WTDs the structure of appointment of senior functionaries in commercial banks need to be studied.

In all commercial banks there exists the full time Chairman, full time Managing Director and full time Whole Time Director. The Chairman is the head of Board ,Managing Director is the head of the administration and Whole Time Director is another senior functionary who will report to the Managing Director. In other words he is subordinate to Managing Director.

In commercial banks because of the huge responsibility bestowed on the senior functionaries this set up is required. But in respect of UCBs may be in big scheduled urban co-operative banks  the appointment of whole time director many be necessary.

In UCBs the Board is an elected body headed by a elected Chairman/President. Hence the question of appointment of whole time chairman does not arise at this point of time. The need for appointment of whole time director in non scheduled UCBs also may not arise.

UCBs which have appointed CEO with the prior approval of the Reserve Bank in terms of the guidelines contained in the circular DoR (PCB). BPD.Cir.No.8/12.05.002/2019-20 dated December 31, 2019 on Constitution of Board of Management in Primary (Urban) Co-operative Banks, may continue with the CEO so appointed till completion of his / her tenure or for a period of three years from the date of initial appointment, whichever is earlier. After the aforesaid period, UCBs shall follow the directions issued herein for appointment / re-appointment of MD.

UCBs, other than those mentioned above, shall review the ‘Fit and Proper’ status of the existing MD in terms of these directions and confirm the same, with the approval of BoD, to the concerned Regional Office (Department of Supervision, Central Office, in case of UCBs under jurisdiction of Mumbai office) of Reserve Bank within a period of two months from the date of issue of this circular. In case, the present MD does not satisfy the prescribed ‘Fit and Proper’ criteria, the UCB shall initiate the process for appointment of new MD immediately. If a UCB had appointed WTD, the bank shall follow the same procedure to comply with these directions.

Appointment of Managing Director / Whole-Time Director

Managing Director, who may also be designated as Chief Executive Officer or by any other name, is a person who is entrusted with the management of the whole, or substantially the whole of the affairs of a UCB, subject to the regulations or directions issued by the Reserve Bank from time to time. MD shall function under the overall general superintendence, direction and control of the Board of Directors (BoD).

If a UCB decides to appoint Whole-Time Director (WTD), who may also be designated as Executive Director or by any other name, the need for such an appointment may be decided by the bank keeping in view the growth in business, expansion of activities, geographical footprints and organisational vision for growth in the medium and long term. The creation of the post of WTD and the functions that can be performed may be decided by the BoD and approved by the General Body of the bank. The WTD shall report to the Managing Director.

The UCBs shall ensure that the following ‘fit and proper’ criteria is fulfilled by the person being appointed as MD/ WTD.

Eligibility-(i)The person shall be a graduate, preferably, with (a) Qualification in banking/ co-operative banking such as CAIIB / Diploma in Banking and Finance / Diploma in Co-operative Business Management or equivalent qualification; or

(b) Chartered / Cost Accountant / MBA (Finance); or

(c) Post graduation in any discipline.

(ii)The person shall not be below the age of 35 years and above the age of 70 years at any time during his/ her term in office. However, within the overall limit of 70 years, as part of their internal policy, individual bank’s Boards are free to prescribe a lower retirement age.

(iii)The person shall have a combined experience of at least eight years at the middle / senior management level in the banking sector (including the experience gained in the concerned UCB) or non-banking finance companies engaged in lending (loan companies) and asset financing.

(iv)Knowledge of regional language may be considered as an advantage.

Propriety Criteria –The person shall not-(i) be engaged in any other business or vocation;

(ii) be holding the position of a Member of Parliament or State Legislature or Municipal Corporation or Municipality or other local bodies;

(iii) be a director of any company other than a company registered under section 8 of the Companies Act, 2013;

(iv) be a partner of any firm which carries on any trade, business or industry;

(v) have substantial interest in any company or firm as defined in Section 5(ne) read with section 56 of the Banking Regulations Act, 1949;

(vi) be a Director, Manager, Managing Agent, partner or proprietor of any trading, commercial or industrial concern;

(vii) be of unsound mind and stands so declared by a competent court;

(viii) be an undischarged insolvent;

(ix) be convicted by a criminal court of an offence involving moral turpitude;

(x) be a director of any other co-operative bank or a co-operative credit society.

The person shall submit a self-declaration on personal integrity as per Annex II.

Tenure of MD/ WTD-(i)The tenure of MD/ WTD shall not be for a period more than five years at a time subject to a minimum period of three years at the time of first appointment, unless terminated or removed earlier, and shall be eligible for re-appointment. The performance of MD/WTD shall be reviewed by the Board annually.

(ii)However, the post of the MD or WTD cannot be held by the same incumbent for more than 15 years. Thereafter, the individual will be eligible for re-appointment as MD / WTD in the same bank, if considered necessary and desirable by the board, after a minimum gap of three years, subject to meeting other conditions. During this three-year cooling period, the individual shall not be appointed or associated with the bank in any capacity, either directly or indirectly.

(iii) UCBs whose existing MD/CEO has completed a tenure of five years at the time of issue of this circular or subsequently, shall approach RBI either to seek re-appointment of the incumbent, if he/she is eligible, or for appointment of a new MD/CEO, within a period of two months from the date of issue of this circular.

Procedure for obtaining approval from the Reserve Bank by the UCBs for appointment / re-appointment / termination of MD/ WTD and remuneration

UCBs shall follow the procedure as prescribed hereinafter for appointment of MD/ WTD and for seeking prior approval from the Reserve Bank.

1.Nomination and Remuneration Committee(NRC)-UCBs shall constitute a “Nomination and Remuneration Committee (NRC)” consisting of three directors from amongst the Board of Directors (BoD) and nominate one among them as Chairman of the NRC. All three members of the NRC are required to be present in each meeting. In case of absence of any member nominated to the NRC, the BoD shall nominate any other director in his place to ensure the quorum. At the time of constituting the NRC, the BoD shall also decide its tenure.

2.Process of making an application to RBI-(i) Subject to any regulations or directions or guidelines issued by the Reserve Bank from time to time, the NRC shall undertake a process of due diligence to determine the ‘fit and proper’ status of a person being considered for appointment as MD/ WTD. For this purpose, UCBs shall obtain necessary ‘Declaration and Undertaking’ as per Annex III from the shortlisted candidates. On completion of the process of due diligence, the NRC shall identify the persons from among the shortlisted candidates and recommend to the BoD for appointment as MD/ WTD.

(ii) NRC shall also recommend the remuneration which shall be payable to the MD/ WTD. While recommending the remuneration, the NRC shall ensure that the cost / income ratio of the bank supports the compensation package and it is consistent with the maintenance of a sound capital adequacy ratio.

(iii) The BoD may pass an appropriate resolution for forwarding the name(s) of the person/s from the panel recommended by the NRC for appointment as MD/ WTD, if it is satisfied that the NRC’s recommendations on the proposed appointment and remuneration are in order.

(iv) In order to expedite the process of appointment, UCBs may submit a panel of at least two names in the order of preference for appointment of new MD/ WTD, to the Reserve Bank, four months before the expiry of the term of office of the present incumbent.

3.Non-Scheduled UCBs with a deposit size of ₹1000 crore and above as per preceding year’s audited balance sheet and all scheduled UCBs shall submit the proposal for appointment of MD/ WTD, along with the supporting documents listed in Annex IV, to the Reserve Bank, Department of Regulation, Central Office, Mumbai. Non-Scheduled UCBs with a deposit size of ₹100 crore or above but below ₹1000 crore as per preceding year’s audited balance sheet shall approach the Regional Office/Central Office (in case of UCBs under jurisdiction of Mumbai office) of the Department of Supervision, Reserve Bank of India, under whose jurisdiction the Registered Office of the UCB is situated, for the requisite approval. The Reserve Bank reserves the right to seek any additional information/documents as it considers necessary.

4.Re-appointment-In the case of a proposal for re-appointment of the incumbent MD/ WTD, the UCBs shall follow the same procedure as prescribed in Para 5.1 above by submitting the complete application in the prescribed form, i.e., ‘Form A’ along with ‘Declaration and Undertaking’ from the candidate, supported by the recommendation of NRC, resolution of the Board approving the recommendation of NRC for re-appointment and a declaration from the UCB that the information is true and complete, to the Reserve Bank six months before the expiry of the term of office of the incumbent.

5.Termination of MD/ WTD by UCB-In case a UCB decides to terminate the services of MD/ WTD before the expiry of tenure, it shall seek prior approval of the Reserve Bank, by submitting detailed reasons thereof along with the relevant documents and a Board resolution to that effect.

6.Temporary appointment of MD/ WTD-Appointment of MD/WTD on temporary basis in UCBs shall be made as per the provisions of Section 10B(9) read with section 56 of the Act. Accordingly, the bank may, with the approval of the Reserve Bank, make suitable arrangements for carrying out the duties of MD/ WTD for a period of not exceeding four months. The bank shall complete the process of regular appointment within the period of the aforesaid four months.

7.Miscellaneous-(i)MD/WTD shall be an ex-officio member of the BoD and may have voting rights in board meetings, if it is permissible under the provisions of the co-operative societies act.

(ii)MD shall be an ex-officio member of the Board of Management (BoM) constituted in terms of circular DoR (PCB).BPD.Cir.No.8/12.05.002/2019-20 dated December 31, 2019.

(iii)In public interest, the MD/ WTD shall execute the deed of covenants in the format annexed (Annex I).

(iv)The appointment/ re-appointment/ termination of MD/ WTD shall be informed to the General Body in the ensuing Annual General Meeting.

The extract of the Gazette Notification JUNE 12, 2021 [PART III—SEC. 4]23rd March 2021 No. DoR.HGG.GOV. 668/12.10.000/2020-21 is as follows,

In exercise of the powers conferred by section 53A read with clause(zj) of section 56 of the Banking Regulation Act, 1949 (10 of 1949), the Reserve Bank, being satisfied that it is necessary so to do, hereby declares that the provisions of item (iii) of clause (b) of sub-section (1) and sub-section (2) of section 10, clause (a) of sub-section (2) of section 10A, sub-section (1A) of section 10B and clause (b) of sub-section (1) of section 35B of that Act shall not apply to a primary co-operative bank having liabilities in the form of deposits amounting to less than Rs100 crores as per preceding year’s audited balance sheet and to a primary co-operative bank, which is a Salary Earners’ Co-operative Bank. Explanation: “Salary Earners’ Co-operative Bank” shall mean a primary co-operative bank whose membership is confined to persons who are or were employed in an institution or a group of institutions and recognised as such by the Reserve Bank.

Prior approval of RBI for appointment/re-appointment/termination of appointment of MD or WTD not required. However, the board of these banks  are required to formulate a Board approved policy based on all the other provisions of these directions for appointment / re-appointment / termination of appointment of MD or WTD. These banks shall immediately report the appointment /re-appointment / termination of appointment of MD or WTD to respective Regional Offices (Department of Supervision, Central Office, in case of UCBs under jurisdiction of Mumbai office) of the Reserve Bank.

The UCBs shall ensure that the following ‘fit and proper’ criteria is fulfilled by the person being appointed as MD/ WTD.

Fit and proper criteria-(Eligibility)-The person shall be a graduate, preferably, with (a) Qualification in banking/ co-operative banking such as CAIIB / Diploma in Banking and Finance / Diploma in Co-operative Business Management or equivalent qualification; or (b) Chartered / Cost Accountant / MBA (Finance); or (c) Post graduation in any discipline.

The person shall not be below the age of 35 years and above the age of 70 years at any time during his/ her term in office. However, within the overall limit of 70 years, as part of their internal policy, individual bank’s Boards are free to prescribe a lower retirement age.

The person shall have a combined experience of at least eight years at the middle / senior management level in the banking sector (including the experience gained in the concerned UCB) or non-banking finance companies engaged in lending (loan companies) and asset financing.

Knowledge of regional language may be considered as an advantage.

Propriety Criteria-The person shall not

(i) be engaged in any other business or vocation;

(ii) be holding the position of a Member of Parliament or State Legislature or Municipal Corporation or Municipality or other local bodies;

(iii) be a director of any company other than a company registered under section 8 of the Companies Act, 2013;

 (iv) be a partner of any firm which carries on any trade, business or industry;

(v) have substantial interest in any company or firm as defined in Section 5(ne) read with section 56 of the Banking Regulations Act, 1949;

 (vi) be a Director, Manager, Managing Agent, partner or proprietor of any trading, commercial or industrial concern;

(vii) be of unsound mind and stands so declared by a competent court;

(viii) be an undischarged insolvent;

(ix) be convicted by a criminal court of an offence involving moral turpitude;

(x) be a director of any other co-operative bank or a co-operative credit society.

The person shall submit a self-declaration on personal integrity as per Annex II.

Tenure of the MD/WTD-The tenure of MD/ WTD shall not be for a period more than five years at a time subject to a minimum period of three years at the time of first appointment, unless terminated or removed earlier, and shall be eligible for re-appointment. The performance of MD/WTD shall be reviewed by the Board annually.

However, the post of the MD or WTD cannot be held by the same incumbent for more than 15 years. Thereafter, the individual will be eligible for re-appointment as MD / WTD in the same bank, if considered necessary and desirable by the board, after a minimum gap of three years, subject to meeting other conditions. During this three-year cooling period, the individual shall not be appointed or associated with the bank in any capacity, either directly or indirectly.

UCBs whose existing MD/CEO has completed a tenure of five years at the time of issue of this circular or subsequently, shall approach RBI either to seek re-appointment of the incumbent, if he/she is eligible, or for appointment of a new MD/CEO, within a period of two months from the date of issue of this circular.

Appointment of MD/WTD on temporary basis in UCBs shall be made as per the provisions of Section 10B(9) read with section 56 of the Act. Accordingly, the bank may, with the approval of the Reserve Bank, make suitable arrangements for carrying out the duties of MD/ WTD for a period of not exceeding four months. The bank shall complete the process of regular appointment within the period of the aforesaid four months.

 Termination of MD/ WTD by UCB-In case a UCB decides to terminate the services of MD/ WTD before the expiry of tenure, it shall seek prior approval of the Reserve Bank, by submitting detailed reasons thereof along with the relevant documents and a Board resolution to that effect.

Miscellaneous-(i)MD/WTD shall be an ex-officio member of the BoD and may have voting rights in board meetings, if it is permissible under the provisions of the co-operative societies act.

(ii)MD shall be an ex-officio member of the Board of Management (BoM) constituted in terms of circular DoR (PCB).BPD.Cir.No.8/12.05.002/2019-20 dated December 31, 2019.

(iii)In public interest, the MD/ WTD shall execute the deed of covenants in the format annexed (Annex I). (iv)The appointment/ re-appointment/ termination of MD/ WTD shall be informed to the General Body in the ensuing Annual General Meeting.

In terms of powers conferred under Sections 10, 10B, 10BB, 35A, 35B, 36AA and 53A (read with Section 56) of the Banking Regulation Act, 1949 The issue of direction by RBI to UCBs relating to appointment/ reappointment/termination of appointment of MDs in UCBs vide circular no RBI/2021-22/60 DOR.GOV.REC.25/12.10.000/2021-22 dated June 25, 2021 has become a talking point in the UCB sector.

For the past several years, RBI has been insisting managements of UCBs to improve the system of governance by adopting professional management practices in the day to day affairs of the bank. Some UCBs consisting of highly intellectual management and professional directors on the boards, have adopted these best practices succeeded too. Many UCBs because of the lack of professionalism, have adopted professional management practices in bits and pieces resulting in limited success. Many UCBs, especially small sized UCBs are yet to improve the governance system in their respective banks. For these reasons and because of failure of several leading UCBs there is trust deficit of public in this sector. This is the reason for bringing more regulatory control over UCBs by amending Banking Regulation Act, 1949.Appointment/ reappointment/ termination of appointment  of MDS in UCBs is one such amendment.

UCBs in India are heterogeneous in character. There are scheduled UCBs having hundreds of  branches and thousands of crores of  deposits. There also exists unit banks having deposits as low as 10 crores. The direction for appointment/ reappointment of  MDs in UCBs is applicable to all UCBs irrespective of the size. A tiny unit bank having say Rs 15 crore deposits also will have an MD to manage the affairs of the bank. It is a fact that the MD may be called by what ever name; He may be even called Manager. But fact remains that he will be under the dual control of the Board of the UCB and RBI.

Under this heterogeneous environment in the UCB sector there is no option but to bring in uniform regulations in the interest of the banking system. Definitely there will be initial hiccups. But once the awareness dawns on the managements which may be a gradual process, MDs may feel at ease and start functioning. It has been nicely said in a FAQ that the post of MD is not a bed of roses

Ever since amendments to Banking Regulation Act,1949 has been brought into effect from June 2020 hectic activities are taking place in the co-operative banking sector. RBI is now empowered to exercise more regulatory control over the co-operative banks, namely The State Co-operative Banks, The Central Co-operative Banks and the Urban co-operative banks. As a sequel to the amendments to B R Act,1949 circulars and directions are being issued by RBI from time to time. The object of bringing amendments to B R Act,1949 is to strengthen the co-operative banking sector which is a part of banking system in our country. Corporate governance in co-operative banks is now the buzz word. The boards, senior functionaries and employees of co-operative banks need to adopt themselves to the changing environment and align their activities so as to comply with regulatory prescriptions.

As a sequel to amendments to Banking Regulation Act,1949 and as a part of better governance system in Urban Co-operative Banks, RBI has issued direction to all UCBs vide circular no RBI/2021-22/60 DOR.GOV.REC.25/12.10.000/2021-22 June 25, 2021 Appointment of Managing Director (MD) / Whole-Time Director (WTD) in Primary (Urban) Co-operative Banks.

This decision of the RBI is a game changer in the management of UCBs. Hence forth the MDs/CEOs of UCBs will be under the dual control of the respective boards of UCBs and the RBI. The employment of MDs/CEOs in respective UCBs are contractual in nature. In future the MDs/CEOs will have more empowerment in the administration of the UCBs simultaneously saddled with onerous responsibilities.

In the recent years banking sector has undergone a sea change in its activities. UCBs being part of banking system are also undergoing a testing time especially due to covid pandemic situation. Managing the affairs of UCBs has become more challenging.

The management and MDs of UCBs need to be more prudent in carrying out banking activities. While it is a fact that the relationship between the MD and the Board is contractual in nature, in future, a more harmonised and coherent environment is called for from directors on the board as well as MD/CEO to take forward the administration of the bank in a smooth and profitable manner.

UCB Consultancy is always in the forefront to impart knowledge in banking to all category of employees of UCBs. In the light of the added responsibility on the part of MDS/CEOs of UCBs to carryon the banking activities in a more professional manner it is proposed to commence, at the first instance an educative programme for the MDs/CEOs of UCBs at this critical juncture. In this connection a series of articles will be published in this website in a phased manner.