Nullified shares complicate lien-backed loans after merger, liquidation

Shareholders of the merged banks and non-bank financial institutions (NBFIs) slated for liquidation may have taken loans against their shareholdings by placing those shares under lien. Regulatory bodies are now pondering solutions to this issue, along with several others feared to arise in the aftermath of the ongoing financial sector reforms.

As the shares of the merged banks have already been nullified and those of the NBFIs are expected to be ultimately valued at zero, any such lien-backed loans could create an additional layer of financial and legal complications.

Post-merger and liquidation concerns were discussed at a meeting on Sunday involving representatives of the Dhaka Stock Exchange (DSE), Chittagong Stock Exchange (CSE), Central Depository Bangladesh Ltd. (CDBL), and associations of brokerage firms and merchant banks. The participants were asked to identify the possible impacts of the reform measures and submit their suggestions to the securities regulator.

The meeting was convened at the office of the Bangladesh Securities and Exchange Commission (BSEC). The special assistant to the chief adviser, Dr. Anisuzzaman Chowdhury, along with the BSEC chairman and commissioners, were present.

Mazeda Khatun, chief executive officer of ICB Capital Management, said it is a common practice that banks and financial institutions disburse loans by keeping securities as collateral.

CDBL's Managing Director Md. Abdul Mutaleb said securities offered as collateral against loans are blocked by the relevant brokerage houses upon completion of the due process.

Those shares remain blocked under a pledged module of the CDBL.

"We don't need to know who the lenders and borrowers are. Our interventions are sought only when the shares are required to be confiscated due to the borrower's failure to repay the loans," Mr. Mutaleb said.

The central bank has already reduced the paid-up capital of the merged banks to zero, effectively nullifying shareholders' claims on those institutions. However, several complications could still arise even after shareholders' claims have been extinguished.

One such concern relates to loans taken by sponsor-directors and large individual shareholders by keeping their shares in listed companies under lien. If it emerges that loans were obtained from other banks using shares of the five merged banks as collateral, it could lead to complex situations.

In such cases, the borrower's equity claim in the merged bank would be zero, while the lender's claim on the pledged shares could remain valid, creating legal and financial ambiguities.

"That's why some officials of the CDBL internally sat on Sunday to discuss the issue and think about possible solutions to such a type of problem," said a senior CDBL official wishing not to be named.

Asked whether there is any likelihood of such loans having been taken by shareholders of the five merged banks, the official said sponsor-directors of different companies had previously been seen to receive loans in this manner.

"It would not be a surprising issue if such cases are revealed. But we need to be prepared to provide solutions to such a case to the regulatory body," he said.

The official added that the securities regulator has asked them to assess the post-merger and post-liquidation impacts involving 14 financial institutions.

There are also subsidiaries of the merged banks and the nine NBFIs that operate in the secondary market.

According to an official of the DSE, the bourses and the CDBL are likely to sit together today to further discuss the issues.

mufazzal.fe@gmail.com