Management of Banking Companies under Sections 10A, 10B and 36AA

Most bank failures are failures of management rather than of arithmetic. The Banking Regulation Act therefore regulates who may sit on a bank's board, what they must know, how long they may stay, what other interests they may hold, and who may remove them. These provisions are unusual in Indian company law, because the general law leaves the composition of a board to the shareholders. In banking, the regulator has the last word.

1. Restrictions on Employment

• Managing agents abolished (Section 10(1)(a)): no banking company may employ or be managed by a managing agent, a form of outsourced management common in Indian company law until the 1960s and incompatible with the responsibility a bank owes its depositors.
• Insolvency and conviction (Section 10(1)(b)(i)): no banking company may employ or continue to employ a person who is, or at any time has been, adjudicated insolvent, has suspended payment or compounded with his creditors, or has been convicted of an offence involving moral turpitude.
• Commission and profit share (Section 10(1)(b)(ii)): nor a person whose remuneration or part of whose remuneration takes the form of a commission or a share in the profits of the company, subject to exceptions for bonus under a settlement, award, scheme or usual banking practice and for commission to brokers and other agents who are not regular staff.
• Excessive remuneration (Section 10(1)(b)(iii) and 10(2)): nor a person whose remuneration is, in the opinion of the Reserve Bank, excessive. In forming that opinion the Bank considers the company's financial condition, size and earnings, the person's qualifications and experience, and remuneration paid elsewhere, and its decision is final under Section 10(6).
• Who may manage (Section 10(1)(c)): a banking company may not be managed by a person who is a director of any other company, other than a subsidiary or a charitable company, who is engaged in any other business or vocation, or whose term of office is for a period exceeding five years at any one time, though renewal for further periods of up to five years is permitted.

2. Composition of the Board

Figure 1: What Section 10A requires of a bank board

• The professional majority (Section 10A(2)(a)): not less than fifty one per cent of the total number of members of the board must consist of persons who have special knowledge or practical experience in one or more of accountancy, agriculture and rural economy, banking, cooperation, economics, finance, law, small scale industry, or any other matter the special knowledge of which the Reserve Bank considers useful to the banking company.
• The rural requirement: out of that majority, not less than two directors must be persons having special knowledge or practical experience in agriculture and rural economy, cooperation or small scale industry. The requirement reflects the social purpose written into Indian banking after nationalisation.
• No conflicting interest (Section 10A(2)(b)): a director must not have substantial interest in, or be connected with as employee, manager or managing agent, any company other than one registered under the charitable companies provision, or any firm carrying on trade, commerce or industry, unless it is a small scale industrial concern. Nor may he be a proprietor of such a concern.
• Maximum tenure (Section 10A(2A)): a director other than the chairman or a whole-time director may not hold office continuously for a period exceeding eight years. The Banking Laws (Amendment) Act, 2025, in force from 1 August 2025, extends this to ten years for directors of cooperative banks.
• Reconstitution: where the board does not comply, the Reserve Bank may by notice require the company to reconstitute it, and may itself remove and appoint directors if the company fails to do so.
• Fit and proper: beyond the statute, the Reserve Bank requires every director to satisfy fit and proper criteria on qualification, experience, track record, integrity and absence of conflict, with an annual declaration and a Nomination and Remuneration Committee to assess them.

3. The Chairman and the Chief Executive

• Chairman and managing director (Section 10B(1) and (1A)): every banking company must have one of its directors as chairman of its board, appointed on a whole-time or part-time basis. A whole-time chairman is entrusted with the management of the whole of the affairs of the company. Where the chairman is part-time, the appointment needs the Reserve Bank's previous approval and the management is entrusted to a managing director. In either case the powers are exercised subject to the superintendence, control and direction of the board.
• Qualifications (Section 10B(4)): the whole-time chairman or managing director must have special knowledge and practical experience of the working of a banking company, the State Bank of India or a financial institution, or of financial, economic or business administration. He is disqualified if he is a director of another company (other than a subsidiary or a charitable company), a partner in a firm carrying on trade or industry, has a substantial interest in another company or firm, or is engaged in any other business or vocation.
• Term (Section 10B(2)): he is in the bank's whole-time employment and holds office for a period fixed by the board not exceeding five years, and is eligible for reappointment.
• Fit and proper (Section 10B(6) and (7)): where the Reserve Bank considers the person not fit and proper, it may, after hearing him and the company, require the company to appoint someone else, and on failure within two months remove him and appoint a replacement, with an appeal to the Central Government within thirty days.
• Filling a vacancy (Section 10BB): where the office of whole-time chairman or managing director is vacant and the vacancy is likely to harm the company, the Reserve Bank may itself appoint an eligible person, who holds office for a period not exceeding three years as the Bank specifies and is eligible for reappointment.
• Tenure policy: the Reserve Bank's governance directions limit the total tenure of a managing director or whole-time director who is also a promoter or major shareholder, and cap the tenure of other managing directors and of non executive directors, with an upper age limit for the latter.
• Separation of roles: the Bank's policy favours separating the post of chairman of the board, held by a non executive director, from that of managing director and chief executive officer, so that the board can supervise the executive.

4. Common Directors and Related Controls

• Prohibition of common directors (Section 16): no banking company incorporated in India may have as a director any person who is a director of any other banking company, and under Section 16(1A) no banking company may have on its board more than three directors who are directors of companies which among themselves are entitled to exercise voting rights in excess of twenty per cent of the total voting rights of all its shareholders.
• Exceptions (Section 16(3)): the bar does not apply to a director appointed by the Reserve Bank, and since the Banking Laws (Amendment) Act, 2025 it does not apply to a director of a central cooperative bank elected to the board of the State cooperative bank of which it is a member.
• Why: interlocking directorates allow coordinated lending, shared exposures and the circulation of confidential information between competing institutions. The section cuts the connection at its source.
• Prior approval (Section 35B): no banking company may, without the previous approval of the Reserve Bank, amend its provisions relating to the maximum permissible number of directors or the appointment, reappointment, termination or remuneration of a chairman, managing director, whole-time director, manager or chief executive officer, or make any such appointment, reappointment or termination.
• Remuneration: the Bank's compensation guidelines require variable pay to be a stated proportion of total pay, with deferral, malus and clawback arrangements so that pay reflects risk outcomes over time rather than in a single year.

5. Removal, Additional Directors and Supersession

Figure 2: The Reserve Bank's powers over bank management

• Removal (Section 36AA): where the Reserve Bank is satisfied that it is necessary in the public interest, or to prevent the affairs of a banking company being conducted in a manner detrimental to the interests of the depositors or prejudicial to the interests of the banking company, or to secure the proper management of the company, it may, for reasons to be recorded in writing, remove from office any chairman, director, chief executive officer or other officer or employee.
• Procedure (Section 36AA(2)): no order of removal may be made unless the person has been given a reasonable opportunity of making a representation to the Reserve Bank against the proposed order. Where delay would harm the bank or its depositors, the Bank may meanwhile direct that he shall not act or take part in the management pending consideration of the representation.
• Appeal: a person aggrieved may appeal to the Central Government within thirty days, and the decision of the Central Government, and subject to that the order of the Reserve Bank, is final.
• Consequences: the person vacates office from the date of the order, and may be prohibited from being in any manner concerned with the management of any banking company for such period, not exceeding five years, as the Reserve Bank may specify.
• Additional directors (Section 36AB): the Reserve Bank may appoint one or more additional directors where it considers this necessary in the interest of banking policy, the public interest or the interests of the banking company or its depositors. Such a director holds office during the pleasure of the Reserve Bank for up to three years at a time, is not required to hold qualification shares, and is not taken into account in reckoning any proportion of the total number of directors.
• Supersession (Section 36ACA): where it is satisfied in the public interest, in the interest of banking policy, or to prevent the affairs of a banking company being conducted in a manner detrimental to depositors, the Reserve Bank may, in consultation with the Central Government, by order supersede the board for a period not exceeding six months, extendable so that the total does not exceed twelve months, and appoint an administrator who exercises the powers of the board, assisted by a committee of experts.

6. Questions Arising

Can the Reserve Bank remove a director of a public sector bank under Section 36AA?

Not directly in the same way. A nationalised bank is a statutory corporation, and Section 51 applies only specified provisions of the Banking Regulation Act to it. The appointment and removal of its directors is governed principally by the Acquisition and Transfer Acts and the schemes made under them, with the Central Government as the appointing authority. The practical result is that the Bank's control over the management of public sector banks is weaker than over private banks, a difference the Bank itself has drawn attention to.

Does Section 10A override the shareholders' right to elect directors?

In substance, yes, and deliberately. Shareholders elect, but their choice must produce a board satisfying the fifty one per cent professional requirement and the two director rural requirement, and the Reserve Bank may require reconstitution and, on failure, remove and appoint directors itself. The justification is that the persons chiefly at risk from bad management are the depositors, who have no vote at all.

7. Quick Revision

8. Frequently Asked Questions

What does Section 10A require of a bank's board of directors?

That not less than fifty one per cent of its members have special knowledge or practical experience in accountancy, agriculture and rural economy, banking, cooperation, economics, finance, law, small scale industry or another field the Reserve Bank considers useful, and that at least two of them have such knowledge of agriculture and rural economy, cooperation or small scale industry. A non executive director may not serve continuously for more than eight years.

Can the Reserve Bank remove the chairman of a bank?

Yes, under Section 36AA, where it is satisfied that removal is necessary in the public interest, to prevent the affairs of the bank being conducted in a manner detrimental to depositors or prejudicial to the bank, or to secure proper management. The person must first be given a reasonable opportunity to make representations, and may appeal to the Central Government within thirty days.

What is supersession of a bank's board?

An order under Section 36ACA by which the Reserve Bank, in consultation with the Central Government, removes the entire board and appoints an administrator to exercise its powers, assisted by a committee of experts. It may be made for a period not exceeding six months at a time, with extensions so that the total does not exceed twelve months, by which time a new board must be constituted.

Why does the law prohibit common directors between banks?

Section 16 cuts the link because interlocking boards permit coordinated lending, shared and concealed exposures, and the movement of confidential information between competing institutions. A director sitting on two bank boards also faces an unmanageable conflict when the two banks lend to the same borrower.

What are the fit and proper criteria for bank directors?

Standards applied by the Reserve Bank beyond the statutory qualifications, covering educational qualification and experience, track record and integrity, the absence of criminal or serious regulatory proceedings, financial soundness, and the absence of conflict of interest. Each director signs a declaration and undertaking, and the Nomination and Remuneration Committee assesses compliance annually.

How long may a person serve as a director of a bank?

Under Section 10A(2A) a director other than the chairman or a whole-time director may not hold office continuously for more than eight years, or ten years in a cooperative bank. A person managing the company under Section 10(1)(c), and a chairman or managing director under Section 10B, may hold office for not more than five years at a time, though renewal is permitted. The Reserve Bank's governance directions impose further limits on total tenure and an upper age limit for non executive directors.

What is the difference between Section 36AB and Section 36ACA?

Section 36AB lets the Reserve Bank appoint additional directors to a board that remains in office. Such a director holds office at the Bank's pleasure for up to three years at a time, needs no qualification shares, and is not counted in reckoning proportions of the board. Section 36ACA goes further and supersedes the board altogether, replacing it with an administrator for up to six months at a time and twelve months in all. The first strengthens a board; the second removes it.

Can the Reserve Bank remove a bank chairman appointed by the bank itself?

Yes. Section 36AA lets the Reserve Bank remove any chairman, director, chief executive officer or other officer or employee where it is satisfied, for reasons recorded in writing, that removal is desirable in the public interest, in the interest of the depositors or to secure the proper management of the bank. The person gets an opportunity to make a written representation, may be barred in the interim, and an appeal lies to the Central Government. The power applies no matter who appointed the officer, and it is distinct from Section 10B, which governs who may hold the office of chairman in the first place, and from Section 36ACA, which supersedes the whole board at once. In practice the removal power is used sparingly and usually after supervisory findings, because removing a sitting officer is a public signal about the bank itself. The more common course is to refuse approval at appointment or reappointment under Section 35B, which needs no show cause process; Section 36AA is reserved for sitting officers whose continuance threatens depositors or proper management.

9. Related Topics and Provisions

• Licensing of banking companies (Section 22)
• Capital, reserve fund and shareholding in banking companies
• Restrictions on loans and advances (Sections 19 to 21)
• Inspection, directions and penalties
• Structure of the Indian banking system