The Supreme Court this week upheld the Corporate Governance rules for commercial banks issued by the Monetary Board of the Central Bank but made certain amendments to the direction.
The order delivered on three connected fundamental rights petitions (objecting to some of the rules) by a 3-judge bench comprising Chief Justice Sarath N. Silva, Justice Nimal Gamini Amaratunga and Justice K. Sripavan, upheld the principles that there should be limits on the age, length of service, and number of directorships that could be held by directors of licensed banks, subject to certain exemptions.

According to a Central Bank press release, the Court also made order in respect of the transitional provisions in relation to three areas, which had been contested in Court under the fundamental rights petitions. These contested issues, the transitional provisions as currently constituted, and the amendments ordered by the Supreme Court, are set out below.

(1)Maximum age of directors
The Monetary Board Direction provides for a maximum age for a bank director at 70 years, while transitional provisions allowed for those bank directors between 70 and 75 years of age as at 1 January 2008, to continue to serve until 31 December 2009, and for those bank directors over 75 years of age as at 1 January 2008, to continue to serve until 31 December 2008. In addition, founding directors and incumbent chairmen were conditionally exempted from the retirement age limits for a further period of five years from 1 January 2008.

In this context, the Supreme Court, while confirming the maximum age limit of 70 years, has ordered a general exemption in respect of bank directors who have reached the age of 70 as at 1 January 2008 or who would reach the age of 70 prior to 31 December 2008, to continue in office for a further period of up to 3 years from 1 January 2009.

(2)Total period of service of a Director to be 9 years.
The Monetary Board Direction provides for a period of service of a bank director to be limited to 9 years, while founding directors and incumbent chairmen were exempted from the application of such limit for a further period of five years from 1 January 2008.

In this regard too, the Supreme Court has upheld the limit of 9 years, while ordering that a bank director who has completed 9 years as at 1 January 2008, or who completes such term at any time during the year 2008, to be entitled to continue for a further period of up to 3 years commencing 1 January 2009.

(3)Directorships in other companies
The Monetary Board Direction provides for a limit of 20 companies in which a bank director could serve as a director, while the existing transitional provisions exempted founding directors and incumbent chairmen from such limit for a period of five years from 1 January 2008.

In this matter too, the Supreme Court upheld the limit of directorships of a bank director to 20 companies, while ordering that a maximum period of three years from 1 January 2009 be granted to any such directors to comply with the Direction and notify the Monetary Board accordingly.

The Court also directed the Monetary Board to include a general provision that, if for any reason such as ill health or other incapacity, the Monetary Board considers the exemptions referred to above should not be granted, the Monetary Board to notify such grounds to the director concerned and after a hearing, the Monetary Board may limit the period of exemption. The Supreme Court further ordered the Monetary Board to issue an amended Direction incorporating the changes as directed by Court.