Even though the calls are getting louder for Kumar Mangalam Birla to resign from the central board of the reserve bank of India over the 'conflict of interest' (read full story here), the apex bank took no definite position on the issue, instead tamely saying that the matter will be looked into by the union government.

“We have to take a view on that (conflict of interest). This is a very recent development. (Kumar Mangalam) Birla has been our director of central board for the last six years. So, we will have to discuss that with the government,” RBI governor D Subbarao told media persons on Thursday.

Birla was nominated as director on the central board of the apex bank in June 2006 under the RBI Act, 1934 by the central government. Following the application submitted by the Aditya Birla group for a new banking licence, uncertainty looms large on the continuity of the group’s chairman on the RBI’s central board with concerns pertaining to conflict of interest being flagged.   

While many believe that there exists a clear case of conflict of interest, the apex bank has refused to clarify its stand and maintains that a final decision on the fate of Birla’s presence on its central board will be taken by the government.

“Only the central government can decide on the nomination or removal of directors on our central board,” a senior official at RBI told Governance Now. “The RBI is not a commercial organization. The central board only plays an advisory role and does not interfere in the bank’s policy-making decisions,” the official further clarified but refused to comment on whether or not there existed a case of conflict of interest.

However, not many seem to be buying the argument and pointed that the board does provide their recommendations on the activities undertaken by the apex bank. They are also informed of progress made on various issues and this will include the granting of licences.

According to Sangeet Shukla, senior advisor with the Indian Banks’ Association, a consortium of 173 members from the banking community, said, “The executive function is within the overall supervision and direction of the Board.”

In addition, C S Jog, former general manager (credit), Punjab National Bank and now executive director, Resurgent India, a financial consultancy questioned, “If the Board members have no say in the policy formulation of RBI why have such a big board with so many leading lights of the country?  By taking this stand RBI is belittling the entire Board.”

The apex bank had issued an exhaustive set of draft guidelines on the new bank licences giving out in detail the eligibility criteria for applicants besides other such things. However, none of the criterion specified if the corporate honchos present on the central board of the RBI are allowed to apply. “Maybe it was too specific a condition to include and the RBI did not foresee the present situation arising,” Shukla conceded.

Whether his recusal from certain board meetings would suffice or would Birla be asked to step down from the RBI board is uncertain but experts strongly recommend that given his stature and reputation it will be best for him to resign from the Board.

Jog pointed that there was a clear case of conflict of interest and said that it would have been best for Birla to resign the moment his company decided to apply for a banking licence. “For one who preaches and practices the ideals of corporate governance it would have been in the fitness of things if he had resigned from the RBI board before the application of his company was submitted to RBI. And now that questions are being raised, it is best for him to resign from the RBI board,” Jog said.

“I don’t perceive a direct conflict of interest but it will be best for him (Birla) to distance himself (from the RBI board),” said M S Sahoo, secretary, Institute of Company Secretaries of India.

The concerns are only going to mount and hence, it would be best for the RBI or better still for Birla to nip the problem in the bud. As of now, the bank's stand flies in the face of a commonly-held practice in draws in general — even in lottery/ lucky-draw contests, the organisers and their dependents are barred from participating.