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State Bank issues guidelines for bank and DFI subsidiaries

KARACHI (March 09 2004): The State Bank has issued detailed guidelines on Monday for banks and DFIs desiring to establish subsidiaries with boards of directors completely independent of parent banks/DFIs.

The SBP issued a circular, saying that in order to maintain appropriate regulatory oversight of and to facilitate the banks/DFIs in establishing subsidiaries for the purpose of diversification of their activities these instructions are being issued.

The subsidiary shall be a public limited company, and the Board of Directors of the subsidiary should be completely independent and different from the Board of Directors of the bank/DFI.

The bank/DFI may nominate its employees on the Board of Directors of the subsidiary up to 25 percent of the total directors, and the remaining directors nominated by the bank/DFI should be independent individuals.

The banks/DFIs desiring to establish any subsidiary shall obtain prior approval of State Bank of Pakistan. The application for the approval should contain the following information:

The functions and activities to be undertaken by the proposed subsidiary.

The investment to be made by the bank/DFI in the paid-up capital of the subsidiary.

The structure of the management and the Board of Directors of the subsidiary and the extent of bank's/DFI's involvement in the management and Board of Directors.

Any feasibility report, if prepared by the bank/DFI.

The inter-relationship of the bank/DFI and the subsidiary covering the functions which will be performed by the bank/DFI for the subsidiary, and vice versa.

The bank/DFI will fulfil all other legal and regulatory requirements needed for the establishment of proposed subsidiary. In case of banks, it should be ensured that the subsidiaries are established only for activities as are admissible under Section 23 of the Banking Companies Ordinance, 1962.

Before increasing its investment in the equity of the subsidiary, the bank/DFI will seek prior approval of State Bank of Pakistan.

It is clarified that per party exposure limit proposed by regulation R-1 of Prudential Regulations for Corporate/ Commercial Banking will be applicable on exposure to the subsidiary, and any type of placement in the form of deposit, purchase of COI, certificates, units, etc shall be considered part of the exposure of the bank/DFI, said the circular.

Further, the exposure of the bank/DFI on mutual funds launched/administered by the subsidiary shall also be considered exposure on the subsidiary.

The banks/DFIs shall take sufficient measures to ensure that the bank/DFI is not exposed to risks, especially reputation and legal risks, on account of its subsidiary. For this purpose, it should be ensured that:

The transactions with the subsidiary should be conducted at arm's-length basis and appropriate fees should be charged for the services rendered by the bank/DFI in this respect.

The bank/DFI should avoid involvement in the day-to-day operations of the subsidiary.

Steps should be taken to make the customers/clients of the subsidiary aware that the subsidiary is an independent organisation and it should not be construed as a part of the bank/DFI.

The Chief Executive, CFO and other employees of the subsidiary company shall not be in the employment of the bank/DFI.

The non-bank finance companies, set up as subsidiaries, will be regulated by the SECP.

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