The Latin phrase ex malo bonum is colloquially understood to mean out of bad comes good. In this case, the Indian banking system is under scrutiny after Syndicate Bank’s (NSE: SYNDIBANK) chairman and managing director Sudhir Kumar (“S.K.”) Jain was arrested for allegedly accepting INR 5 million in bribes to improve the credit of companies including Bhushan Steel Ltd. (NSE: BHUSHANSTL) and Prakash Industries Limited (NSE: PRAKASH). Yet, despite the gloom of Mr. Jain’s arrest, there may be good news for India’s corporate governance as this incident has identified a serious frailty involving the concentration of power among executive directors and the need for improved board oversight.

In the case involving Mr. Jain, his arrest by the Central Bureau of Investigation (the “CBI”) on August 2, 2014, is important as he is one of the more senior executives at a state-run bank to be arrested (“CBI Arrests Syndicate Bank CMD in Rs 50 Lakh Bribery Case.” The Times of India. August 3, 2014). Moreover, Mr. Jain’s case has brought to the forefront questions of over how an executive is appointed along with oversight of whole-time (executive) directors. Specifically, the CBI is currently looking into the procedures of Mr. Jain’s appointment as it has been characterized as not being “transparent” (Pramod Kumar. “Jain Selection for CMD Post Unclear.” The Asian Age. August 13, 2014). Through the lack of board oversight over Mr. Jain and his activities, this has resulted in Syndicate Bank being over exposed to both companies by INR 1 billion for Bhushan Steel (“SBI Wants External Agency to Run Bhushan Steel after MD’s Arrest.” The Times of India. August 9, 2014). In comparison, there are uncertainties whether Prakash Industries can refinance foreign currency convertible bonds held by Syndicate Bank (Abhijit Lele. “CARE Downgrades Prakash Industries’ Issuer Rating.Business Standard. August 12, 2014).

In similar fashion, the question of board oversight extends to the private sector. In this case, the vice chairman and managing director of Bhushan Steel, Mr. Neeraj Singal, and Bhushan Steel’s CFO, Mr. Arun Agrawal, were arrested in connection with the S.K Jain bribery case. Likewise, the executive chairman of Prakash Industries, Mr. Ved Prakash (“V.P.”) Agarwal, was also arrested in connection with the bribery scandal involving Mr. Jain. For both companies though, there is seemingly a dearth of information regarding whether the boards of Bhushan Steel and Prakash Industries were aware of the activities of their executives. However, for Bhushan Steel, since banks are now facing the prospect of being over-extended on this company to the extent of INR 400 billion and there are concerns over the company’s solvency, Bhushan Steel had no choice but to accept oversight from its lenders in the form of four new lender-appointed independent directors (“Lenders Order Audit; Noose Tightens on Bhushan Steel.” The Economic Times. August 19, 2014).

The saga of Mr. Jain is symptomatic of frailties within Indian corporate governance, with the question of board oversight playing prominently within the banking sector and companies that are deemed to be highly leveraged. For example, both Dena Bank (NSE: DENABANK) and Oriental Bank of Commerce (NSE: OBC) are facing mandatory forensic audits after a failure in risk management allowed for INR 4 billion to be misappropriated. In both instances, the Ministry of Finance has taken steps to strengthen risk management for state-run banks, while examining the role of the board chairman (“Banking Frauds Force Finance Ministry to Take Tough Measures.” Data and Analysis. August 21, 2014).

Similarly, there are concerns about whether the boards of banks are closely managing their companies’ risks and maintaining proper oversight of their loans and managing risk. For instance, there are serious questions about the solvency of companies like Kingfisher Airlines (NSE: KFA), which is considered to be a non-performing asset and a wilful defaulter. Moreover, Kingfisher has been further implicated in a scandal involving the company’s chairman and managing director who has been accused of diverting funds, as determined by a compulsory forensic audit (“Kingfisher Airlines Chairman Vijay Mallya Summoned by Court.The Economic Times. September 18, 2014, and “Kingfisher Airlines Diverted Funds to Formula One: Audit.” Data and Analysis. September 19, 2014). In such instances, there is a need for banks to develop stronger corporate governance as part of top-down risk management and oversight. Where situations like Kingfisher Airlines, Bhushan Steel or Prakash Industries have developed, the failure to identify the risk resides with the board of directors, which unfortunately has been plagued by irregularities in executive appointments, deficient transparency and overall poor governance (Mahua Venkatesh. “What Ails India’s Banking Sector?” Hindustan Times. August 22, 2014).

Although India is taking steps to strengthen board oversight – for example, in the separating of chairman and managing directors under the Companies Act, 2013 – there remains a need for further improvement. For state-run banks in particular, the separating of the chairman and managing director positions may take on greater urgency as the Reserve Bank of India has sought to reduce the “absolute power” of the chairman-managing director in order to strengthen risk management and reduce corruption (“Finance Ministry Mulls Splitting Post of CMD for State-Run Banks.” Business Standard. August 26, 2014). Yet, despite the harm that Mr. Jain and others have caused, such crises should not be wasted in making meaningful improvements to corporate governance practices and board oversight that may have otherwise contributed to Mr. Jain and the frailties of Indian corporate governance.