Proposed amendments to the Bank Company Act

The Bank Company Act 1991 has been a subject of much criticism for long.  The recent proposed amendments to the Act are believed to be intended to address some of the much talked about issues, particularly in respect of punitive actions against wilful defaulters. On account of the proposed amendments, the wilful defaulters will encounter some restrictions in travelling abroad, purchasing shares, exercising his/her directorship and so on. 

In the proposed amendments, few definitions have been given a broader meaning to include a larger group of people. For example, the definition of 'family' has been extended to father-in-law, mother-in-law, grandchild, and other dependents. Moreover, the definition of 'person' will include both natural and legal person. One of the most eye-catching and important change is the inclusion of the term 'wilful defaulter borrower'. Previously, it was very difficult to hold the wilful defaulter borrower liable because there was no clear provision in this regard. If the new amendment comes into force, it would be easier to take action against them. Furthermore, in order to maintain international standard of practice and principle, some changes have been suggested as regards the definitions of loan, money laundering, fiduciary duties, financial offences and terrorist financing.

A new provision concerning the explanation of the date of acquisition i.e. possession and mutation has been suggested to be added as it is acknowledged that inclusion of mutation as the date of acquisition is a prerequisite for the entitlement to sell the property.

According to the proposed amendment, if any procedure regarding misappropriation of money, corruption or forgery goes against any Chairman, Director, Managing Director (MD), Chief Executive Officer (CEO) or two tier lower officers, that person will be disallowed to participate in any activity, directly or indirectly, in  the management and administration of the Bank Company. Even that person will be disqualified to be appointed in other Bank Companies. Moreover, while the directors are given notice of investigation regarding any allegation of assisting defaulter borrower, they will be barred from leaving the post until the procedure of the notice is completed.

For development in the banking sector, good governance and sustainability are the prerequisites. Thus, under section 14A of the proposed amendment to the  Act, some strict prohibitions have been imposed. Previously, it was prohibited to have shares of more than 10 per cent, jointly or individually, by  the family members of the director/s, and now according to the new amendments any Group of Companies/Institutions, any Institutions/Companies having interest-- even though both having separate entities-- are also not allowed to have more than 10 per cent share. These will prevent dominance by any single Company or Family or Group/Institution owned by the Bank. This will ensure good governance and sustainability in the sector.

The proposed Section 14B of Bank Company Act 1991, requires the approval of the Bangladesh Bank to qualify a person/company/institution to be a substantial shareholder. In the proposed amendments there are inclusions of two conditions. Firstly, no bank company can be a substantial shareholder of another Bank Company. Secondly, if any legal entity is a substantial shareholder of a bank company, then, such entity cannot be a substantial shareholder of another bank company. Upon following these conditions, the associated risks of bank loan can be reduced by controlling the participation of banks in the Stock Exchange for any share investment. Besides, this provision is expected to maintain good governance and stability in the financial sector and protect the interest of small investors.

In the previous Act, approval of Bangladesh Bank was needed for appointment, posting, dismissal or removal of Directors, MD and CEO. The proposed amendment also includes prior approval for re-appointment/re-posting of Directors, MD, CEO and also lower officers up to two tiers. Previously, it was prohibited for a director of a bank company to be a director of another bank company during the course of his/her directorship. In order to prevent control of a single industrial group, now the same rules are proposed to apply to the agents/representatives as well. Nevertheless, these rules are not applicable for the state owned banks. This shows inequality and inequitable treatment with the private banks. Therefore, it can be revisited for the sake of uniformity.

Few rules included in the new amendment seem harsh in nature. For example, as regards the provision of disqualification of officials who have allegations or upon investigation some evidence of forgery, financial offences, illegal activities are found, they do not have the option to challenge the decision in the court. Furthermore, under section 46 of the Bank Company Act, Bangladesh Bank has the authority to remove the Chairman, Directors, Managing Director, Chief Executive Officer, or maximum two-tier lower level officers of any Bank Company for such allegations. Though such provision can prevent harmful illegal activity, it is not in keeping with the right to justice. The fundamental rights of the incumbents must be ensured, i.e. right to fair trial, right to self-defence, and right to self-explanation. In addition, all the allegations must be proved beyond reasonable doubt. Otherwise, such provisions would be disproportionate and consequently, could be challenged in the High Court Division of the Hon'ble Supreme Court under Writ Jurisdiction.

Some new provisions as regards the execution of the Board of Directors of Bank Company have been proposed to be amended. Previously, only three independent directors were required in an institution. According to the new proposal, minimum eleven directors are required; however, the proportion of the independent director must be at least one fifth of the total number of directors. Moreover, following the international practice and principle, requirement of academic, professional and practical qualification of the directors have been stated.  An alternative director can be appointed once a year and the tenure of the director's office must not exceed six months. Furthermore, according to the proposed amendments every Bank Company has to form "Nomination and Remuneration Committee" and "Ethics and Compliance Committee" to deal with the relevant matters.

New amendments in the Bank Company Act require personal guarantee and security before getting grant of loans or advances. This provision applies to any company or person associated with the director/s as well. The application will be the same for any bank group or its director or family members having at least 20 per cent voting rights in a public limited company. In the case of Sharia banking, the family members or related persons of the director are not allowed to have Mudaraba and Musharaka without any security. This provision is an effective mechanism to eliminate the influence over the bank; also, it renders proper discipline and governance in any ailing banking/financial sector. It is illegal for any bank company to provide loan facilities to a defaulting borrower. All directors and officers in charge will be held liable for breach of this provision. This law carries penalty of minimum five lac taka fine or three years imprisonment or both.

Additionally, in the amendment of Bank Company Act, section 27AA demands greater accountability of the directors, and also provides for severe penalty if found guilty. Section 27AAA requires identification and listing of wilful defaulter borrowers to promote excellent governance and administration in any bank company. Under section 27AAAA, wilful defaulter borrowers will not be allowed access to further loan facility and soon after taking possession of their mortgaged properties, those will be up for sale. The defaulters will also barred from attending any state functions and getting state recognitions. Such actions will eliminate the risk factors associated with loan facility and may be considered a much awaited and bold step in ensuring proper accountability of the wilful defaulters. 

According to the proposed amendments, after submitting the financial information to the Bangladesh Bank, now the Bank Companies do not need to publish the same information in the newspapers; releasing those on the website would be enough.  This provision is a good initiative as it would reduce the expense of the banks; besides, everyone will be able to easily access required information online at anytime from anywhere.

The proposed amendments in the Bank Company Act have addressed most of the lacking of the previous Act upholding international standard of practice and principle. Nevertheless, few provisions as regards penalty and disqualification of the Directors, MD, CEO and other relevant officers should be revisited. Overall, the proposed amendment of the Bank Company Act may play a vital role in dealing with the major problems of wilful defaulter borrowers, arbitrary control of a single industrial group or family, and thus ensure good governance and efficient management of the banking sector.

Barrister Shafayat Ullah is Advocate, Supreme Court of Bangladesh

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