Corporate Governance in accordance with Banking and Insurance Law

Corporate Governance in accordance with Banking and Insurance Law

This article on Corporate Governance is written by Priyal, a 4th year student from ICFAI UNIVERSITY, DEHRADUNand an intern at Legal Upanishad.


The article is going to put light on the role of corporate governance in the banking and insurance sector under banking and insurance law. It is going to cover the meaning of corporate governance, its origin, its applicability in the field of banking and insurance law.

Today, the laws existing are harmonizing the various dimensions and regulations of the financial sector of our country. We live in a society where everything is regulated with some rules and regulations to prevent anarchy and disturbance in society. The same is required for the governance of financial institutions and other companies which deliberately contribute to the growth of the economy.

Corporate Governance

The concept got emerged when some companies in the UK shut down due to lack of adequate governance. To overcome this, London Stock Exchange set up a committee called as Cadbury Committee to resolve the issue.

Corporate Governance is a set of a kind of relationships between the management of a company that incorporates the business. It deals with transparency, fairness as well as accountability in a company. It further enables the sustainability of a company to compete in a market fruitfully. Corporate Governance comprises the board of directors, its shareholders, and the management.

The main objective of corporate governance is to build corporate values and objectives for financial organizations. To set the roles and responsibilities of different positions in an organization.

Evolution in India

In India, there have been several initiatives taken to build corporate governance in the nation since 1990. It was first launched by CII in India in 1998. Then it was launched by SEBI under Cl 49 of listing agreements and got revised upon recommendations committees in 2002. Further, it was dealt with by NCC and NMC in 2002. However, in 2009, MCA provided certain guidelines 2009 for incorporating corporate governance. These guidelines were based on the company’s board of directors, their responsibility, Audit and Auditors committee, WB Mechanism, and Secretarial audit.


Good corporate governance is a must to achieve and maintain the trust of the public and their confidence in the Indian banking system. Banks play an essential role in the stability of the economy therefore there is a need for it. The bank has investments as well as savings of too many people for its security. Also it is the duty of the bank to check about any criminal acts related to finance or against the bank which requests for good corporate governance.

RBI as a watchdog of Corporate Governance

In India, RBI is the regulator of Corporate Governance and hence plays a pivotal role in the implementation of corporate governance among various financial institutions. The mechanism of corporate governance followed by RBI are categorized as:

Transparency & Disclosure:

These are a highly important part of corporate governance. As the investments, as well as savings of people’s, are with banks so their regulation by RBI is a must as there is the disclosure of transactions made by the banks to the RBI. This lets RBI keep records of the activities of banks in the nation. Any failure in disclosures leads to the imposition of serious fines upon the banks.

In recent cases, RBI has imposed serious and heavy fines upon Tumkur Veerashaiva Cooperative Bank Ltd of Karnataka and Devi Gayatri Cooperative Bank of Hyderabad under S.47A(1)(b) r.d. S.46(4) of The Banking Regulation Act,1949 for not abiding with the RBI guidelines and directions upon loans to be given to directors and their relatives.

Distant Surveillance:

This was initiated in 1995 for the first time. It is an obligation upon RBI to have an annual inspection of the records of various banks to promote good governance in the sector. Since RBI cannot inspect individually at the places one by one, so there is a procedure for distant surveillance. The main motive behind it is to check up on the financial status of the banks so that in case of any disparity, RBI could grant remedies against it.

On-time corrective measures:

While launching corporate governance for the banks, RBI set certain points based upon NPA and CRAR along with ROA. Upon these setpoints, every bank has to abide by the mandatory action plan of RBI which was created to maintain the healthy financial capacity of the bank.

Recent Developments

In 2020, RBI planned to amend the structure of corporate governance in the banking system of the nation. Where it decided to limit the terms of the directors as well as the CEOs of the companies; by increasing responsibilities over them relating to finance. It presented certain guidelines for implementation which were:

  1. For prompt governance, management of the banks, and separate ownership, the tenure of directors and CEOs of the companies shall be limited.
  2. Such directors and CEOs are given 10 yrs to stabilize their company’s operation in an effective manner.
  3. Any functionary of management apart from prompter or shareholder can become directors or CEO’s for a period of 15 yrs continuously.
  4. A person can only be re-appointed for such a position after the term of 3yrs is expired.
  5. The board of directors through its NRC shall review and monitor the outcomes to check if bank-wide compensation is desirable or not. It shall be done annually.


The insurance companies in India are being surrounded by the complex socio and economic pattern of the nation. They are responsible to themselves and other constituencies for the way of their investment to conduct the business. They hold a fiduciary obligation to the stakeholders, therefore, need proper functioning.

Regulatory Authority

The corporate governance under the insurance sector is regulated by IRDA to govern the business of insurance in India. In 2016, IRDA issued certain guidelines upon corporate governance to ensure healthy governance in the insurance sector. Such guidelines were made considering The Companies Act of 2013 and other related regulations. It is the responsibility of the board of companies to abide by it and if not, then a heavy amount of fine will be imposed by IRDA.

The guidelines include

Structure of governance:

It states that it is the authority of the director to control appointments in companies.

Three directors:

There shall be 3 directors mandatorily in a company and such a board of 3 directors will be liable for the illegal actions of the insurance companies. However, there are independent and non-independent directors in a company. The independent directors shall meet once every year to evaluate the performance of non-independent directors as per schedule 4 of The Companies Act of 2013.

Responsibilities of boards:

The directors are responsible for the just treatment with employees as well as policyholders, for prompt business procedures, and compliance with the insurance act.

Controlling the power of the board:

It is the responsibility of the board to identify, assess, control, and monitor the risks and compliance with the policies of the board.

Functions of corporate committees:

Board can assign important responsibilities to the various committees and can also let them monitor the entire organization. Such committees are the audit committee, the investment committee, the risk management committee, the committee for the protection of policyholders, the nomination and remuneration committee, the CSR committee.

Arrangements for outsourcing:

All such arrangements shall have the approval of the committees and also comply with the outsourcing policy of the board.

Disclosure needs:

It is the duty of the board to disclose quantitative as well as qualitative information about the financial status of insurance companies.

IRDA reporting:

All the insurers would be liable to inspect the level of compliance with the guidelines and to also make compliance by themselves.

The policy of Whistleblower:

Such policy should be there to inspect irregularities in respect of following good governance.

The necessity of IRDA Compliance

A new business while setting up shall comply with several legal provisions for getting legally established. The same is with insurance companies. Once such companies start operating officially, they need to comply with IRDA rules and regulations for its effective operation. It is necessary to comply with IRDA regulations to:

  1. Ensure that the insurance companies are legally registered.
  2. To settle the grievances of policyholders.
  3. Ensure the appropriate monitoring system for companies.

Such statutory compliance is monitored by IRDAI based upon various statutory acts such as The Insurance Act, 1938. The Insurance Regulatory and Development Authority Act,1999, The Companies Act 2013, FEMA,1999, etc.


An exceptional nature of working of the banking system and insurance sector creates the necessity for good corporate governance to monitor their activities for legal compliance. Such governance is a need of the Indian economy to restrict illegal bank and insurance activities; and to safeguard the interest of people and organizations. However, the insurance companies and banks shall not be pressurized to incorporate strict governance that leads to the slowdown of financial transactions.


  1. Khalid Khan. (n.d). All About Corporate Governance in the Banking Sector, Blog IPleaders.
  2. Corporate Governance Guidelines for Insurance Sector. IRDAI.
  3. Puneet Kaur. July,2020. Role of Corporate Governance in Indian Banking Sector. Research Gate.
  4. IRDA Compliance for Insurance Company. Enterslice.
  5. IRDA Regulations for insurance companies. IRDA.

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