BB arming itself with new law to manage bank ownership transfer, stem future legal tangles

Summary:

• New law empowers central bank to regulate bank ownership changes
• The "Bank Regulation Act" draft grants merger and acquisition authority
• Proposed rules specify board restructuring during bank mergers
• Special law targets ownership tied to past alleged fraud cases
• Separate institution planned to oversee bank ownership transitions

The government is developing a special law to empower the central bank to regulate bank ownership changes, mergers, liquidations, and acquisitions. The move comes in response to concerns over the ownership of certain banks previously controlled by individuals and conglomerates linked to the ousted Awami League government.

The Bangladesh Bank (BB) has already finalised a draft of this proposed legislation, the "Bank Regulation Act", according to officials familiar with the matter.

The proposed law would grant BB the authority to approve the transfer of ownership, mergers, and acquisitions of weak banks, circumventing the need for approval from the current owner. 

In addition, this law could shield BB and potential buyers from legal challenges that may be raised by the previous owner.

Multiple investigations by the Bangladesh Bank have uncovered significant loan irregularities committed by these businessmen in the banks under their control

"The law has been drafted, we are now collecting feedback from the Financial Institutions Division, the BB's Banking Regulations and Policy Department and the Legal Department. Afterwards, it will soon be reviewed in a stakeholder meeting with representatives from banks, the law ministry, and experts," a senior central bank official told TBS, on condition of anonymity.

The proposed law specifies procedures for transferring shares of bank shareholders/owners whose holdings are confiscated by the government for reasons like debt repayment or tax arrears. Proceeds from such share sales will first settle liabilities with any surplus deposited back into their accounts, he said.

"The new law is being made very clear. When two banks merge to form a new entity with a new name, the previous banks may have had 20 directors each, totalling 40 directors. However, the new bank will have only 20 directors. This law clearly states who will be removed from the board of directors and how," said the official.

"If a bank is merged with another without creating a new entity, the draft law also specifies the number of shares the directors of the merged bank will hold and who will serve on the board," he added.

Purpose of the new law

Another central bank official told TBS that during the 15-year tenure of the ousted Awami League government, businessmen with close ties to the government took control of several private banks through alleged fraud and the forced transfer of shares. 

Multiple investigations by the Bangladesh Bank have uncovered significant loan irregularities committed by these businessmen in the banks under their control. As a result, these banks are now in dire straits, he said.

The official said the Bangladesh Bank, led by its new Governor Ahsan H Mansur, dissolved the previous boards and appointed new ones for at least 10 troubled banks, including Islami Bank Bangladesh, Social Islami Bank, First Security Islami Bank, Union Bank, Global Islami Bank, Bangladesh Commerce Bank, and National Bank, all of which were controlled, directly or indirectly, by the Chattogram-based S Alam Group. Additionally, the boards of IFIC Bank, United Commercial Bank (UCB), and Exim Bank were also dissolved.

"While changes were made to the boards and management of these banks, ownership changes were not possible. The National Board of Revenue [NBR] has prohibited the transfer of a large portion of shares held by many bank owners," he said. 

Additionally, many of these owners are either absconding or have been arrested and imprisoned on various charges. As a result, a special law is being introduced to allow the government to transfer shares in the absence of the owner or without their approval, the official added.

To ensure tax collection in October last year, the NBR instructed the Registrar of Joint Stock Companies and Firms (RJSC) to halt the transfer (buying, selling, and donation) of shares in seven conglomerates, including S Alam and Beximco Group, which were reportedly granted special privileges during the previous Awami League era. Currently, several of the country's weak banks are owned by companies linked to these groups.

A separate institution to manage ownership change

Dr Zahid Hussain, a member of the Banking Sector Reform Taskforce and former lead economist at the World Bank's Dhaka office, told TBS, "The Bank Regulation Act is being developed to address weaknesses in the current law regarding bank mergers, acquisitions, and liquidation."

He explained that under this law, a separate institution will be created, overseen by the Bangladesh Bank, to manage ownership changes, mergers, liquidations, or acquisitions of shares in weak banks.

The law is being designed to prevent former owners from regaining ownership through legal action or putting the new owners at risk, he said, emphasising that if this safeguard is not in place, potential buyers will be deterred from acquiring shares or ownership from influential bank owners.

A separate law to safeguard depositors

Zahid Hussain said that when a bank is liquidated, the interests of depositors must be prioritised. Under the current Deposit Protection Act, depositors are entitled to refunds of up to Tk1 lakh, but concerns remain about those with amounts exceeding this limit.

To address this, a new Deposit Insurance Act is being developed to extend insurance coverage to all depositors, clarifying the amount of coverage and the conditions under which it will be provided, said the economist. 

Additionally, the asset quality of weak banks is being reviewed, Zahid said, and once it is determined how much of the default loans can be recovered, a decision will be made regarding the change of ownership of these struggling banks.