Central Bank accommodates Seylan

Questions are being raised in banking circles as to why the Central Bank relaxed some of its directions on Corporate Governance for Licensed Banks, claiming it was due to a settlement the regulator had over a dispute with Seylan Bank on these directions last year.

The regulator in a communiqué on Wednesday explained that the changes by way of transitional provisions had 'expanded' with a view to further facilitating the 'smooth transition' by banks to the direction on Corporate Governance for Licensed Banks, issued in December last year. "These additional transitional provisions give special consideration to the role and contribution of founding directors and incumbent chairmen to the promotion and stability of banks," it said. The Seylan Bank went to courts regarding this code last year where Dr. Lalith Kotalawala, Chairman of the Seylan Bank, had questioned the decision to implement a Mandatory Code of Corporate Governance for Licensed Banks. He said the provision, sought to be introduced by way of this code for licensed banks, was against all principles of natural justice. Subsequently, the two parties had discussions with regard to these issues which they decided to settle out of courts.

Nivard Cabraal, Governor Central Bank told The Sunday Times FT that after representations by some banks, the regulator had analysed the issue and decided to relax the regulations. "The situation is a little risky and we did not want to upset the system in terms of smooth transition of directors," he said.

However, he noted that Central Bank is 'only' giving transitional provisions. "We are only relaxing slightly. We are only accommodating the founding directors and the incumbent chairmen," he added.

These directions are in section 3 (2) of the Corporate Governance for Licensed Commercial Banks (LCBs) and Licensed Specialised Banks (LSBs). Earlier the code said that in the case of two or more directors who have served more than nine years as at January 1,2008, out of those whose period of service exceeds nine years, the longest serving needs to resign by the end of 2008 and thereafter, at the end of each succeeding year, the remaining directors need to vacate office in sequence, at least one director each year (on the basis of the longest to the shortest length of service as a director) until all directors who served more than nine years as at January 1, 2008 resign. The latest date for this process in the earlier code was December 31, 2011.

In the amendment under three Directions, i.e., Direction 3(2)(ii) regarding the maximum total period of service of a director, Direction 3(3)(i) regarding the maximum age of a director, (earlier those above 75 years would get one year to retire and those between 70 and 75 years would have two years) and Direction 3(3)(ii) regarding the number of companies/entities/institutions that a director could serve, the expanded transitional arrangements provide for an exemption for a maximum period of five years in the case of founding directors and incumbent chairmen, by the Monetary Board on a case-by-case basis. Such exemptions would be granted upon a request being made in accordance with the process as set out in the Directions.

Industry analysts say that mostly Seylan’s director board is covered in these amendments. However, they said the new amendments give special consideration to the role and contribution of founding directors and incumbent chairmen to promote stability of the banks and get their technical and professional expertise.