New Delhi: In an unusual move, the Reserve Bank of India (RBI), in a confidential communication to Karnataka Bank dated July 17, 2026, has withheld approval for variable pay for Srikrishnan Hari Hara Sarma, the bank’s former Managing Director and Chief Executive Officer, and Sekhar Rao, its former Executive Director, for Financial Year 2025.The RBI also declined to allow their financial year 2024 Employee Stock Option Ownership Plan (ESOPs) to be converted into cash.For private-sector banks such as Karnataka Bank, RBI regulations require regulatory oversight of remuneration for managing directors, CEOs and whole-time directors. While bank boards can approve remuneration, it is subject to RBI oversight. As per Section 35B of the Banking Regulation Act, 1949, RBI has to approve the terms and conditions and remuneration of whole time directors in private sector banks. As per RBI’s governance directions for commercial banks,“The deterioration in the financial performance of the PVB [private sector bank] shall generally lead to a contraction in the total amount of variable compensation, which may even be reduced to zero.”The RBI had earlier approved, and the bank had disbursed, the cash component of their financial year 2024 variable pay. After Sarma and Rao announced their resignations as Whole Time Directors on June 29, 2025, the board, following considerable discussion, approved their financial year 2024 ESOPs and variable pay for financial year 2025.However, by the time the board approved their financial year 2024 ESOPs, both executives had left the bank, prompting the board to request that the RBI allow the ESOPs to be converted into cash.The combined value of their financial year 2024 and financial year 2025 ESOPs, along with the financial year 2025 cash component of variable pay, is estimated at about Rs 25 million (Rs 2.5 crore).In the above table, the monetary value of Share Linked remuneration of the MD and ED is fully (100%) deferred and allocated in a 30:30:40 ratio, to be distributed over the subsequent three years.The RBI’s communication to the bank said that the conversion of financial year 2024 ESOPs into cash and payment of financial year 2025 variable pay for both former executives “would not be accepted”.RBI’s letter explains the reason why, saying that “in view of several supervisory issues and governance concerns, as well as observations in the bank’s records indicating serious governance lapses by the executives, zero variable pay has been approved for financial year 2024–25 for both former whole time directors”.Auditor concerns precede resignationsThe executives resigned abruptly on June 29, 2025, after auditors raised an Emphasis of Matter in Karnataka Bank’s 4QFY (fourth quarter financial year) 2025 results, published on May 14, 2025.According to the auditors, the whole-time directors approved expenses that exceeded their delegated authority, and the board declined to ratify them.In a May 25, 2025 article on The Wire regarding the conduct of the then CEO and ED, Hemindra Hazari, a Securities and Exchange Board of India (SEBI)-registered independent analyst, wrote, “Karnataka Bank’s experiment of hiring top executive leadership from outside the bank has been far from successful. Profits and profitability have steadily declined, while corporate governance at the highest executive level has deteriorated sharply. The bank’s CEO and ED are exceeding their delegated authority in open defiance of the board of directors.”“No institution can retain executives when such information is public, as doing so would signal to staff and the wider public that exceeding one’s authority and defying superiors will be tolerated. Once auditors flag such misconduct, no institution – and certainly no bank – can allow those executives to remain in office. The auditors’ comment has sealed the fate of Karnataka Bank’s whole-time directors. The CEO and ED have no place in any boardroom because they have shown no respect for higher authority and have lost the board’s confidence,” Hazari wrote.Sarma and Rao joined the bank on May 26, 2023, and April 15, 2023, respectively, for three-year terms. During their tenures, from 2QFY2024 to 4QFY2025, the bank’s performance deteriorated sharply, with profitability collapsing.Their relationship with the board was also conflict-ridden, ultimately leading to their exit several months before their terms ended.It is worth noting that when the executives resigned abruptly, a section of the media portrayed the episode as a strategic clash between an external CEO seeking to transform the bank and a more conservative board, rather than simply a compliance and performance failure by Sarma and Rao.Voting pattern of Quant Mutual Fund on the re-appointment of directorsIndeed, after Sarma and Rao’s departure, Quant Mutual Fund, one of Karnataka Bank’s institutional shareholders, voted against the reappointment of Justice (retd.) AV Chandrashekar, independent director; BR Ashok, non-executive director; Raghvendra Bhat, Managing Director and CEO; Uma Shankar, independent director; DS Ravindra, independent director; and Balakrishna Alse, independent director.The exception was its vote in favour of another term for chairman Pradeep Kumar Panja, who had supported Sarma and Rao. Quant cited the bank’s poor performance and the abrupt resignations as reasons for its dissent. Strangely, those same reasons were not applied to the board’s highest authority.Karnataka Bank’s key financial and share price data show a clear deterioration while Sarma and Rao were in charge, followed by a strong recovery after Raghvendra Bhat succeeded Sarma as CEO.The regulator’s communication makes clear that the RBI viewed the executives’ performance poorly, particularly on supervisory and governance issues. It concluded that they did not merit variable pay for financial year 2025 and should not be allowed to convert their financial year 2024 ESOPs into cash.By withholding approval for the former Karnataka Bank whole time directors’ variable pay, the regulator has sent a clear message to private sector banks: even when a board approves variable pay, whole time directors may forfeit it if the RBI finds their performance subpar or identifies governance concerns.