Unfit to Serve: A Closer Look at Paytm Payment Bank's Former 'Independent' Directors

Three new developments herald a possible new beginning for Paytm Payments Bank: The reconstitution of its board of directors, apparently due to pressure from the Reserve Bank of India (RBI); the stepping down of Vijay Shekhar Sharma (who owns 51% stake in the bank) as part-time chairman; and the induction of former government bankers and a former government bureaucrat as independent directors.

The board’s reconstitution and the withdrawal of the nominee directors of One97 Communications (which owns 49% stake in the bank), were likely necessary to prevent the interference of shareholders in the bank’s operations as well as their influence on independent directors.

The central bank’s move to curb Paytm Payments Bank’s operations highlights how independent directors – who are meant to protect the interests of customers and the general public – align themselves with promoter interests when there is a dominant shareholder on the board. A positive outcome of the move is that independent directors who remained silent and declined to either rectify the deficiencies highlighted by the regulator, or resigned at the appropriate stage, can no longer go unpunished. Proxy advisory firms are right to consider them unfit to serve on a corporate board of directors.

History of regulatory action against Paytm Payments Bank

Source: Media and RBI

Paytm Payments Bank had a history of RBI censures for violations pertaining to onboarding of customers, and especially, in the all-important know your customer (KYC) guidelines. As per media reports, RBI detected hundreds of customer accounts were onboarded without proper documentation, and more than 1,000 customers were reportedly linked to a single Permanent Account Number (PAN). Such violations suggest either poor operational practices to facilitate business growth, or more ominously, a business strategy of money laundering.

Globally, KYC has become the bedrock of banking, as banks must have comprehensive knowledge of their customers, depositors and borrowers from a risk management as well as an anti-money laundering perspective. Therefore, when the banking regulator serves notice for violations, penalises and even takes the extreme step of stopping onboarding of new customers (as the RBI did with Paytm Payments Bank on March 11, 2022), the board of directors must take notice and immediately address the concerns to the regulator’s satisfaction. The bank’s independent directors, however, managed to sleep soundly through all the noise.

Paytm Payments Bank board of directors from FY22 to FY23

Source: Paytm Payments Bank

In FY22 and FY23, Vaibhav Goel (chartered accountant), Sairee Chahal (entrepreneur), Manju Agarwal (former deputy managing director of State Bank of India), Ramesh Abhishek (former IAS officer) and Shinjini Kumar (former RBI executive, former CEO of Paytm Payments Bank and an entrepreneur) were the independent directors of the bank.

During this period, all the independent directors had the necessary expertise and experience of being part of corporate boards and the role of independent directors. When a bank has a history of regulatory displeasure and a high turnover of chief executive officers (CEOs) – four in eight years – independent directors have to be more vigilant in overseeing the executive and demanding compliance reports.

Paytm Payments Bank CEOs since 2016

Source: Paytm Payments Bank

Schedule IV Section 149(8) of the Companies Act, 2013, dealing with the code of conduct for independent directors, says, in its ‘role and functions’ category:

“The independent directors shall: (1) help in bringing an independent judgment to bear on the board’s deliberations, especially on issues of strategy, performance, risk management, resources, key appointments and standards of conduct; (2) bring an objective view in the evaluation of the performance of the board and management; (3) scrutinise the performance of management in meeting agreed goals and objectives and monitor the reporting of performance; (4) satisfy themselves on the integrity of financial information and that financial controls and the systems of risk management are robust and defensible…”

In terms of ‘duties’, it says: “Where they [independent directors] have concerns about the running of the company or a proposed action, ensure that these are addressed by the Board and, to the extent that they are not resolved, insist that their concerns are recorded in the minutes of the Board meeting…”

When the RBI documents various violations and penalises a bank, it should be taken extremely seriously by the board of directors. Typically, the Audit Committee – in which Vaibhav Goel, Manju Agarwal and Sairee Chahal were present as independent directors, and sometimes the Risk Management Committee, with Ramesh Abhishek, Manju Agarwal and Shinjini Kumar as independent directors, will examine the issues raised by RBI more closely.

The board appoints a compliance officer to ensure that the issues highlighted by the regulator are addressed. A time-bound compliance report has to be first submitted to the board, notifying that the bank has complied with the RBI’s directive and addressed its concerns. This report is thereafter sent to the RBI.

Paytm Payments Bank’s Audit and Risk Management Committee in FY23

That the Paytm Payments Bank’s board of directors, including its independent directors, during this period, abjectly failed in carrying out their role and duties is evident from the public statements made by senior RBI officials after the regulator asked the bank to stop incremental business.

RBI deputy governor Swaminathan J. said, “This is supervisory action on a regulated entity for persistent non-compliance. Such actions are invariably preceded by months, and at times, years of bilateral engagement where we not only point out deficiencies but provide more than adequate time to take corrective action.”

On February 8, 2024, Shaktikanta Das, RBI governor, said, “Sufficient time is given to non-compliant entities but action is taken when bilateral talks don’t yield action.”

What is shocking is that the board of Paytm Payments Bank had two experienced bankers, Shinjini Kumar, a former RBI official and also a former CEO of Paytm Payments Bank, and Manju Agarwal, a former senior executive of SBI. Both of them would have been familiar with RBI’s regulatory and supervisory procedures, as well as KYC norms for banks. Yet, despite their presence, the bank was unable to satisfy the regulator’s concerns.

Apart from their expertise and experience, many independent directors are selected for their lack of spine in protecting non-promoter interests. In the absence of founders, professional management prefers individuals who do not grill the management, and quietly acquiesce to decisions which may be adverse to minority/public interests. The conduct of independent directors ensures not only the extension of their terms with the support of the promoter/management but also qualifies them eminently to serve on the boards of other companies.

Normally independent directors consist of chartered accountants and lawyers whose business interests are intertwined with the corporate world, former bureaucrats, former bankers and retired company executives who require additional income or prestige associated with the corporate world. As technology is playing a vital role in business, boards also require IT specialists. Till date, independent directors  and public interest directors have not suffered the consequences of presiding over and being complicit in poor governance in Yes Bank, IL&FS, or the National Stock Exchange, and in the massive siphoning of funds from companies which had to wind up.

The independent directors, who are seen as mute spectators, avoid annoying corporates by standing up for minority/public rights, and thereby ensure that they will be invited to more sleeping boards. They are rewarded for being silent and complicit in misgovernance. What’s not to like?

However, this environment is changing with the coming of age of proxy advisory firms, which recommend to their institutional clients how to vote on resolutions, including the appointment and re-appointment of directors. Both Stakeholders Empowerment Services (SES) and Institutional Investor Advisory Services (IiAS) have recommended not to support Manju Agarwal’s re-appointment as an independent director in CMS Info Systems, on account of her poor track record on the board of Paytm Payments Bank. The SES report, in particular, is scathing on her performance at the bank. The report comments on her performance in the light of the prior regulatory issues.

“The question is, what did she do? Did she use her experience in resolving the issue? The answer is No. The problems persisted and culminated in the death warrant for Paytm Payments Bank. Were her suggestions ignored? Possibly, but if she can resign now [link], she could have done it long back, thus bringing fault lines of the bank in open and would have saved not only problems faced by stakeholders but for herself, as SES views this as loss of reputation for her after a chequered career at the premier bank. Thus, SES concludes that she did not adhere to the code of conduct as envisaged and failed in protecting the institution.”

The same fate will rightly befall all the other independent directors at Paytm Payments Bank during FY23 when their terms come up for re-appointment or if they are mistakenly selected for their “expertise and experience” as directors in other companies. There are consequences for independent directors who sit on boards while turning a blind eye to repeated regulatory lapses and sending their resignations immediately, prior or post stringent regulatory action to possibly save their reputation.

Other directorships held by individuals who were independent directors of Paytm Payments Bank in FY22 and FY23

Source: Linkedin

A new age is dawning for independent directors who were complicit in not protecting minority/public interests, and who remained comfortable knowing these qualities would get them successive terms in the same company, as well as new directorships in other companies.

The maturing of proxy advisory firms and the influence they wield on institutional investors has turned the tables on the old exclusive power structure, where being compliant with promoters and executive management guaranteed permanent membership to the directors’ club.

Hopefully, under the watchful eyes of independent analysts and proxy advisory firms, independent directors will discover their spine; failing which they will face public humiliation, by being rejected by shareholders.

Hemindra Hazari is a Securities and Exchange Board of India (SEBI) registered independent research analyst.