Banking and Insurance - Laws and Practice · Control over Organization of Banks

Board of Directors and Management of Banking Companies

Updated 11 October 2026 · Fact-checked

The Banking Regulation Act, 1949 controls who sits on a bank's board and who runs it. Section 10A requires at least 51% of directors to have specialised knowledge and no business conflicts. Section 35B requires RBI approval for the chairman, managing director, whole-time directors and CEO, and for their remuneration terms.

Understand Board of Directors and Management of Banking Companies

A bank holds public deposits. So the law does not leave its board and top management to the shareholders alone. The Reserve Bank of India (RBI) has a say in who governs a bank and on what terms.

Section 10A deals with the board composition. At least 51% of the total directors must have special knowledge or practical experience in listed fields: accountancy, agriculture and rural economy, banking, co-operation, economics, finance, law, small-scale industry, or any other matter RBI considers useful. Of these directors, at least two must have knowledge or experience in agriculture and rural economy, co-operation or small-scale industry.

These same directors must also be free of business conflicts. They must not have a substantial interest in, or be connected as employee, manager or managing agent with, a company (other than a company registered under section 25 of the Companies Act, 1956) or a firm that carries on trade, commerce or industry and is not a small-scale industrial concern. They must not be proprietors of such a concern either.

Section 35B deals with the top management. The appointment, re-appointment or termination of a chairman, managing or whole-time director, manager or chief executive officer takes effect only with RBI's previous approval. Amendments to provisions on the maximum number of directors, or on appointment or remuneration of these persons, need RBI approval to have effect. This applies whether the provision is in the memorandum, articles, an agreement, or a resolution of the general meeting or board.

The text supplied to you covers sections 10A and 35B. Section 36AA (RBI's power to remove managerial and other persons from office) and the power to supersede a board are not in that text. Study them from your ICSI material and state them only with the conditions you have learnt.

Key rules to remember

Board composition under section 10A(2): Qualified directors ≥ 51% of total board strength; Total number of board members is the base, not the number present at a meeting. Qualified means special knowledge or practical experience in the listed fields and no disqualifying business interest.
Minimum sector directors: At least 2 of the qualified directors must be from agriculture and rural economy, co-operation or small-scale industry; These two are counted within the 51%, not on top of it.
Cap on tenure under section 10A(2A)(i): Director other than chairman or whole-time director: continuous tenure ≤ 8 years; The chairman and whole-time directors are excluded from this cap.
Removed chairman or whole-time director, section 10A(2A)(ii): Ceases to be a director and is ineligible for re-appointment for 4 years; Applies where removal was under the provisions of the Banking Regulation Act. The four years run from the date of ceasing to be chairman or whole-time director.
RBI approval under section 35B: Appointment, re-appointment or termination of chairman, MD, whole-time director, manager or CEO → previous RBI approval; Amendments to provisions on remuneration, or on the maximum number of directors, need RBI approval to have effect.
RBI direction to reconstitute under section 10A(5): Hearing → written order → 2 months → removal by lots and RBI appointment; If the bank does not comply within two months of receiving the order, RBI may determine by lots whom to remove and appoint a suitable person.

How to solve Board of Directors and Management of Banking Companies questions

Board and management questions are fact-based. Test each fact against a section and reach a conclusion.

1Identify the issue: board composition, tenure, a top management appointment, remuneration, or RBI's power to direct or remove.
2Name the provision. Composition and tenure point to section 10A. Appointment and remuneration of top persons point to section 35B.
3For composition, count. Compute 51% of the total board and check how many directors meet both the knowledge test and the no-business-interest test.
4Check the sector rule: at least two of the qualified directors must be from agriculture and rural economy, co-operation or small-scale industry.
5For appointments, ask whether RBI gave previous approval. Apply the rule that without approval the appointment or termination has no effect.
6Apply the saving provisions: under section 10A(8) board acts are not invalid only for a defect in composition. Section 35B(3) protects acts done before the defect in appointment is shown to the bank.
7State the conclusion and the practical step: reconstitute the board, apply to RBI, or comply with RBI's order.

Quickest way: Three-question check

When to use it: Use it when a long case gives many facts and you have little time.

Is it about who sits on the board? Count 51%, check knowledge and business interests, then the two-director sector rule and the eight-year cap.
Is it about the chairman, MD, whole-time director, manager or CEO, or their pay? Ask: was there previous RBI approval?
Has the board failed the rules? Write the sequence: board reconstitutes, RBI hears the bank, issues an order, two months, then removal by lots. Close with the validity of past acts.

Common mistakes in Board of Directors and Management of Banking Companies

Saying 51% must be experts only in banking.
Students remember the word banking and ignore the rest of the list.
Fix: List all the fields: accountancy, agriculture and rural economy, banking, co-operation, economics, finance, law, small-scale industry, and others RBI finds useful.
Treating the two sector directors as additional to the 51%.
The proviso reads like a separate requirement.
Fix: The proviso says out of the aforesaid number. They are part of the 51%.
Applying the eight-year limit to the chairman or whole-time director.
Students remember the limit but not the exclusion.
Fix: Section 10A(2A)(i) excludes the chairman and whole-time directors. It caps other directors.
Saying RBI approval is needed only for appointment.
Students think of approval as an entry gate.
Fix: Section 35B also covers re-appointment, termination, and amendments to provisions on remuneration or on the maximum number of directors.
Holding that board decisions are void if the board was wrongly composed.
Students assume non-compliance cancels everything.
Fix: Section 10A(8) says no act or proceeding is invalid only because of a defect in composition.
Stating that RBI can remove a director immediately.
Students skip the procedure.
Fix: Under section 10A(5), RBI first gives a reasonable opportunity of being heard and a written order, and acts only if there is no compliance within two months.

Worked examples

Example 1

Sagar Bank Ltd has a board of 12 directors. Seven have special knowledge in finance, law, banking or accountancy and no disqualifying business interest. Of these seven, one has experience in small-scale industry. Does the board comply with section 10A(2)?

Show the solution

51% of 12 = 6.12, so at least 7 directors must qualify (6 is below 51%).
Seven qualified directors meet the numerical requirement.
The sector rule needs at least two qualified directors with knowledge in agriculture and rural economy, co-operation or small-scale industry. Only one such person is present.
So the proviso is not satisfied.
Under section 10A(3), the board must reconstitute itself. Under section 10A(5), RBI may direct reconstitution after hearing the bank.

Answer: The 51% requirement is met, but the board does not comply because only one director comes from the sector fields; at least two are needed. The board must reconstitute itself, failing which RBI may act under section 10A(5).

Example 2

Meridian Bank Ltd's board appoints Mr. Rao as managing director and he starts work and signs several contracts. RBI approval was neither sought nor given. Later, RBI declines to approve. What is the effect on his appointment and his earlier acts?

Show the solution

Section 35B(1)(b) says the appointment of a managing director takes effect only with RBI's previous approval.
Approval was not obtained beforehand, so the appointment had no effect.
Section 35B(3) says acts done by such a person are not invalid merely because it is later discovered that his appointment had not taken effect.
The protection does not cover acts done after it has been shown to the bank that the appointment had no effect.
Practical step: the bank should stop him from acting, seek a valid appointment with RBI approval, and record the position in the board minutes.

Answer: The appointment is ineffective for want of previous RBI approval. His earlier acts are not invalid on that ground, but acts after the bank has been shown that the appointment did not take effect are not protected.

Exam tips

Write the section number with the rule: 10A for composition and tenure, 35B for top management and remuneration. State them only where you are sure.
Do the percentage arithmetic on the page. Round up, because 51% of the total must be reached.
In case questions, follow provision, facts, conclusion. Finish with the practical compliance step.
Learn section 36AA and the supersession powers from your ICSI material, and attribute each power to RBI with its conditions.

Practice questions from Control over Organization of Banks

Board of Directors and Management of Banking Companies in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Board of Directors and Management of Banking Companies: frequently asked questions

What does section 10A of the Banking Regulation Act require?

At least 51% of the board must be persons with special knowledge or practical experience in listed fields and without disqualifying business interests. At least two of them must be from agriculture and rural economy, co-operation or small-scale industry.

Does a bank need RBI approval to appoint its chairman?

Yes. Under section 35B, the appointment, re-appointment or termination of a chairman, managing or whole-time director, manager or chief executive officer takes effect only with RBI's previous approval.

Are board decisions invalid if the board did not meet section 10A?

No. Section 10A(8) says no act or proceeding of the board is invalid only because of a defect in its composition or because a member did not meet the requirements.

Is there a limit on how long a bank director can serve?

Yes. Under section 10A(2A), a director other than the chairman or a whole-time director cannot hold office continuously for more than eight years.