What should Kumar Mangalam Birla, chairman of the Aditya Birla Group and member of the central board of the Reserve Bank of India, do about the clear case of ‘conflict of interest’ that he faces now?

On July 1, Aditya Birla Nuvo, a non-banking financial corporation, submitted its application to the RBI, joining 25 other corporate houses in the race for a banking licence. The group which boasts of an impeccable reputation, steady growth and strong financials is being seen as a promising contender. However, its chairman's presence on the central board of the apex bank has left various industry experts sceptical about the credibility of the selection process.

Calls for him to either recuse himself from the meetings on the issue of the grant of banking licences or resign altogether are getting stronger. However, the Aditya Birla Group has stolidly stated that there is no ‘conflict of interest’ in the matter. Rakesh Jain, managing director, Aditya Birla Nuvo has clarified saying, "There is no conflict of interest whatsoever."

While the jury is still out on what action Birla should take, it is clear that his role on the board of RBI will remain an impediment to transparency and fairness of the selection procedure.

“Issues relating to conflict of interest arise when someone is involved with a process or is in a position to influence the outcome. Hence, in order to rule out any such doubts, he should at least recuse himself from those meetings of the RBI's board in which discussions on the new licences take place,” said JN Gupta, former executive director with the Securities and Exchange Board of India (Sebi) and founder and managing director of proxy advisory firm, Stakeholders Empowerment Services.

Gupta added that except for the executives' compensation, the processes of the Birla group were generally in line with the principles of corporate governance and that for the group to maintain its respectable position it was the most practical solution for the chairman to recuse himself from certain board meetings of the apex bank.

Meanwhile, another former senior official with Sebi said that till the company was considering applying for the licence and was weighing its options it was fine for the chairman to continue to be on the RBI's board but then he should step down when the application is taken up for consideration. "This is similar to a situation where a father is present on the panel interviewing his own son. There is always a possibility that the panel is influenced even if the person excuses himself from interviewing his son. The Birlas are a reputed group and the chairman will definitely take the right decision of stepping down as director of the RBI board when the time comes," the official told Governance Now.

The official further highlighted that there have been various issues pertaining to conflict of interest that went unaddressed. "Sometime during the early or mid 1990s Narayan Murthy and Ashok Ganguly were nominated as directors of the central board of RBI and they continued to serve as directors on the ICICI Bank's board. In fact, Ganguly was also present on the Board for Financial Supervision when ICICI Bank presented its audit report. That is the closest one can get to becoming the judge in one's own court," he said.

According to Rohit Bansal, chief executive and co-founder of India Strategy Group, Hammurabi & Solomon Consulting, the chairman should acknowledge the fact that there is a ‘potential conflict of interest and should hence, resign from the RBI board. “The world expects him to be a beacon light in corporate governance. He needn't hide behind technicalities like recusing himself during a discussion on his company's application or even absenting himself during the entire process on new licenses being contemplated. His advisors should tell him the virtue of proactively stating a 'potential conflict of interest' and to resign from the central board of the RBI. He must exceed societal expectations,” he said.

"I would imagine there is a conflict of interest involved if he stays on the board while his group's application is evaluated. I doubt that it suffices for him to recuse himself from meetings on the subject. It would be more appropriate for him to step down from the RBI board," said T T Ram Mohan, faculty member, Finance and Accounting at IIM, Ahmedabad.

Birla was appointed to the RBI’s central board under section 8 (1) (c) of the RBI Act, 1934 by the central government in June 2006.

That the participants cannot be a member of or related to members of the organisation conducting a lucky draw/lottery is an oft-repeated disclaimer that appears with the announcement of any draw/lottery. This should hold in corporate governance as well. So, would a mere recusal do?