The experts, while expressing their concern over the Banking Companies Amendment Bill 2009, said that it is a multitude of draconian amendments in the Banking Companies Ordinance, 1962 (BCO) and would amount to a virtual nationalisation of the Pakistan banking industry.
While talking to Business Recorder here on Tuesday, the experts including Tariq Jamil, former senior international banker, Sarfaraz Mahmood, Managing Partner of Riaz and Company (a chartered firm), Khawaja Amjad Saeed, Principal Punjab University Hailey College of Banking and Finance said that in most developed countries the banking regulatory approach is shifting from a rule based to a principles-based-approach to regulation.
This means that State Bank of Pakistan should be moving away from prescriptive rules to a higher level of articulation of what bank managements are expected to do to sustain viable business models. Further, the State Bank should facilitate, collaborate and guide the banking industry and develop schemes to stimulate economic growth and generate employment.
The State Bank should also take steps to check the rapidly increasing inflation, reduce gap "between the haves and haves not". It should restrict to introducing effective monetary and fiscal policy to get rid of fiscal problems rather than fixing the share prices of the banks at micro level, they opined. They said that such a confiscatory law is unprecedented and unheard of in the entire world.
Even western governments that have poured huge amounts of public money into their banking systems, besides sovereign guarantees for depositors have been engaged in a broad based consultative process to reform the regulatory mechanism. It would appear that, so far, in none of the developed countries, government authorities have approved any set of legislation to radically change the supervisory regime in the manner recommended and approved by the National Assembly of Pakistan, the experts said.
According to them, under the amended Ordinance, the State Bank of Pakistan (SBP) can change management in banks, impose loses on shareholders by writing down their capital, intervene and take control of banks, appoint administrators to manage banks and restructure banks when symptoms of crises are determined.
The amendments will strip down the powers vested with the federal government by virtue of existing Section 47 and Section 93 of the BCO. The overriding effects of the proposed amendments will shift these powers to the State Bank, they maintained. Almost all the proposed amendments seek overriding effects on other provisions of BCO and even other laws that are enforced in Pakistan.
Many provisions if enacted will bypass the role of SECP, Courts of Law and at least in two instances even the federal government. A number of provisions in the proposed bill are in direct violation of fundamental constitutional rights like Article 2A, 4, 9, 18, 23, 24 and 25 of the Constitution.
Beside, at various instances these amendments arbitrarily deprive the individual from their property rights including force sale, share price fixation by the State Bank, force dilution of shareholding, insertion of shareholder in a banking company by direction of the central bank and that too against consideration determined by the State Bank and various other confiscatory measures.
They were of the view that neither a judicious mind has been applied nor have other existing rules been paid any heed to and no regulation or law been cross-referred. Overriding effects means withdrawal of all previous protections or promises by the government (in the form of any law) to a local or foreign investor, for instance the Protection of Economic Reforms Act, 1992 and all the other laws of similar nature.
Further, the proposed amendments suggest a fundamental shift from "to regulate a banking company" towards "to regulate a member/shareholder of a banking company". In the entire scheme of corporate laws in force in Pakistan, such powers are vested with Securities and Exchange Commission of Pakistan (SECP).
This jurisdiction overlap will surely open up a new Pandora Box or a potential conflict among various regulators in Pakistan. Similarly, bypassing SECP and the Court of Law for schemes of reconstruction, amalgamation and mergers will knock down all the case laws and resultant interpretations of various provisions of corporate laws and doctrines and principles established during the last many decades, they added.
The experts further said the new insertions in Section 14 of the proposed Ordinance contain state that notwithstanding any provisions contained in any other law for the time being in force, if the State Bank has determined that a member of a banking company is holding or, is a beneficial owner, of five percent or more shares of a banking company without prior approval of the State Bank or where any percentage of shareholding is or is likely to be detrimental to the interest of the banking company or its depositors or otherwise undesirable, the State Bank may require such member to reduce, divest or transfer to a fit and proper person, his shareholding in the banking company by such amount within such period and in such manner and at such price as may be specified in the order".
They also said the provisions of these amendments will not only override the BCO but also any other law for the time being enforced in Pakistan. Besides, the entire emphasis is to regulate the shareholder of a banking company instead of a banking company itself; for reasons best known to the State Bank.
So far there is no guidance or mechanism provided for such 'determination' by the State Bank then the only criteria left is the sole discretion of SBP or it may be discrimination in few cases. Similarly, the term 'beneficial owner' can be defined at large, so is the case with 'is or is likely to be detrimental' or 'or otherwise undesirable '. Further, this targets each individual shareholder, even if the holding is one share only.
So SBP virtually at its own unguided discretion may ask any existing shareholder of a banking company irrespective of the size of shareholding to transfer his/her shareholding to a specific fit and proper person at a specific price fixed by the State Bank. Moreover, the amendments fail to guide whether one can move to higher courts or not. Any condition on an ordinary share/script impairs its intrinsic value. So that would be the case with banking scripts on stock exchanges.
Market will heavily discount the value of banking scripts once these proposed amendments are enacted, they maintained. The experts further pointed out that the Section 14(1) (iv) of the BCO effectively prohibits shareholdings in a banking company exceeding five percent by anyone shareholder, except with the approval of Federal Government (on the State Bank's recommendations), under Section 93 of the BCO. Again, it seems that these amendments have been drafted in haste; otherwise SBP's role is to be the recommender and Federal Government's role is as the final approver, these responsibilities should not have been mixed up.
Under the sub section 4, if the State Bank is satisfied that conditions are not favourable for such payment, or the financial position of a banking company so warrants, it may restrict or prohibit any banking company from paying dividends to its shareholders for such period as may be specified in the order.
Another proposed amendment is an insertion of new sub-section (4) in Section 29 of BCO that further stiffen the criteria for cash deposits of a banking company. According to insertion of sub sub-sections and provisos in Section 41B, the State Bank can appoint itself as an 'administrator' and then can also define its powers and functions or enhance or impose limitations. The concept of regulator and regulatee will cease to exist in this situation. It is difficult to understand the rationale behind this proposed amendment unless one reads the remaining amendments.
They further said the proposed amendments in Section 41B of BCO empowers the State Bank to appoint itself as administrator and exercise the powers of all the stake holders without any intervention by court of law or Federal Government. All most all the amendments arbitrarily empower the State Bank to invoke various penalised measures that include dilution of shareholding of a banking company by forcing the bank to issue shares to any person chosen by SBP at consideration fixed by SBP.
Again such measures have overriding effect on Section 96 to Section 107 of the Companies Ordinance, 1984 and any other law for the time being enforced. SBP may also direct the banking company to transfer any assets and liabilities to another banking company or other interested party on such terms and conditions as may be determined by the SBP.
The experts said the country's recent history is full of various irrational steps taken by these so called independent regulators under political pressures like freezing the foreign currency account in May, 1998, write off of loans, undetected prudential violations in Mehran Bank or Indus Bank, suspension of trading at Stock Exchanges and suggesting haircut for mutual funds on arbitrary rating by SECP. They stressed the need for the adopting prudent approach on the matter so that the foreign investors' interest remains intact.
Comments
Comments are closed.