RBI Rejects Variable Pay and ESOP Cash Conversion for Former Karnataka Bank Top Executives — September 21, 2026

In a decisive enforcement of banking governance standards, the Reserve Bank of India (RBI) has rejected the payout of variable compensation for Karnataka Bank’s former top management. The banking regulator withheld approval for the financial year 2024–25 (FY25) variable remuneration for Srikrishnan Hari Hara Sarma, the bank's former Managing Director and Chief Executive Officer, and Sekhar Rao, its former Executive Director.

The central bank also rejected a proposal submitted by Karnataka Bank's board to convert the two executives' FY24 Employee Stock Option Plan (ESOP) grants into cash payouts.

Regulatory Intervention and Powers Under Section 35B

Under Section 35B of the Banking Regulation Act, 1949, private sector banks in India are required to seek explicit regulatory approval from the RBI for the appointment, termination, and remuneration packages of whole-time directors and chief executives.

The central bank’s compensation framework for commercial banks explicitly mandates that variable remuneration must align with risk-adjusted performance and sound governance practices. RBI directions stipulate that deteriorations in financial health, compliance deficiencies, or governance failures should trigger a significant reduction in variable pay, which can legally be curtailed to zero.

Both executives stepped down from their positions as whole-time directors on June 29, 2025. Following their departures, the bank's board had approved their FY24 ESOP allotments along with FY25 variable pay proposals, subject to regulatory clearance. Because both leaders had already severed formal executive employment before the vesting and exercise cycles, the board approached the RBI seeking permission to liquidate the ESOPs into a direct cash settlement—a request the regulator declined.

Underlying Governance and Spending Concerns

The regulatory pushback follows heightened scrutiny over administrative decisions and operational spending during the executives' tenure. Statutory auditors Ravi Rajan & Co. LLP and RGN Price & Co. had previously raised corporate governance concerns in the notes to Karnataka Bank’s Q4 FY25 financial statements.

The statutory auditors reported that the bank had incurred expenditures that exceeded the delegated executive authority of the whole-time directors, without prior sanction or post-facto ratification from the board of directors:

Auditor-Flagged Expenditures:

• Consultancy Engagements: Approximately ₹11.6 million incurred in relation to external consultants without necessary delegated powers.
• Capital and Operational Expenses: Over ₹3.7 million in revenue and capital spending executed beyond sanctioned administrative thresholds.

The auditors had observed that the unapproved expenditures, totalling ₹15.3 million, were liable to be recovered from the former executives. Alongside these compliance discrepancies, the lender had experienced persistent margin compression and deteriorating operating metrics across several preceding quarters, departing from its historically conservative operating profile.

Implications for Indian Banking and Investors

The RBI's move sends an unambiguous message to institutional investors, bank boards, and executive suites across the Indian financial sector:

Key Takeaways for Market Participants:

• Board Decisions Are Not Final: Regulatory vetting serves as a binding check, demonstrating that board-approved executive payouts remain contingent on compliance and governance standards.
• Heightened Scrutiny on Mid-Tier Banks: The central bank is extending its supervisory rigour equally to regional and mid-sized private lenders, curbing executive discretion where delegated limits are breached.
• Strengthened Alignment of Pay and Conduct: Institutional shareholders can expect stricter enforcement of clawback, malus, and withholding provisions when governance irregularities emerge.

Following the management exits, Karnataka Bank has worked to stabilise executive leadership, elevating Raghavendra S. Bhat as Chief Operating Officer and advancing board reconstitution to reassure markets and depositors regarding institutional continuity.

Tags: Karnataka Bank Reserve Bank of India Banking Regulation Act Nifty Bank Corporate Governance Executive Compensation