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Banking Companies (Amendment) Bill 2009 passed: SBP given powers to take control of banks

ISLAMABAD (February 09 2010): The National Assembly has passed the Banking Companies (Amendment) Bill 2009 enabling the State Bank of Pakistan (SBP) to change management in banks, impose losses on shareholders by writing down their capital, intervene and take control of banks, appoint administrators to manage and restructure banks when symptoms of crises are determined.

The National Assembly Monday passed Banking Companies Ordinance, 1962, (The Banking Companies (amendment) bill 2009 moved by Finance Minister Shaukat Tarin. Minister for Health Shahabuddin tabled the bill in the House on behalf of Finance Minister following clearance from National Assembly standing committee on finance.

According to the objectives of the Banking Companies (Amendment) Act, 2009, the recent financial crises world-wide have clear linkages with weak supervisory regime. The ever-changing dimensions of banking business continue to create newer challenges and risks for bank depositors, regulators and financial systems as a whole. Therefore, it is necessary to provide matching tools to bank regulators for corrective measures with the view to maintain financial stability.

The proposed amendments in banking companies Ordinance 1962 are in the context of strengthening necessary tools of bank regulation and supervision to safeguard against various risks. The amendments would enable State bank of Pakistan to 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 existing law provides these powers in one form or the other. However, there is need to bring coherence and certainty of measures to deal with the troubled situations. This would ensure enhanced confidence in the system through stability and soundness of banking sector, it added.

National Assembly standing committee on finance had recommended an amendment in the Act, which required the banking company or board of directors of the banking company to furnish documents of commitment for compliance with the measures prescribed by the SBP and to secure the interest of its depositors.

In the Banking Companies Ordinance, 1962, in section 14, after sub-section (3), the following new sub-sections shall be added, namely: The State Bank, if satisfied, may require any banking company, through an order in writing, to increase its paid up capital by such amount within such period and in such manner as may be specified in the order.

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 per cent 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.”

Amendment of section 19, Ordinance LVII of 1962: In the said Ordinance, in section 19, after sub-section (3) the following new sub-section shall be added, namely:

“(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.”

Amendment of section 26A, Ordinance LVII of 1962: In the said Ordinance, in section 26A, after sub-section (4), the following new sub-section shall be added, namely:

“(5) Where the State Bank has determined that a banking company,- is carrying on its business in a manner detrimental to the interest of its depositors; is materially unable to discharge its financial obligations or continue its operations; or, has failed to carry out any direction, the State Bank may impose conditions or restrictions on the banking company on accepting deposits from any class of depositors or types of deposits for such period as may be specified in the order.”

Amendment of section 29, Ordinance LVII of 1962: In the said Ordinance, in section 29, after sub-section (3), the following new sub-section shall be added, namely:

“(4) The cash deposited by a banking company under sub-section (1) and by a scheduled bank under sub-section (1) of section 36 of the State Bank of Pakistan Act, 1956 (XXXIII of 1956) shall be deemed to be part of the assets of the banking company but shall not be subject. to any encumbrance, nor shall it be available for the discharge of any liability of the banking company other than order of liquidation made by the High Court under this Ordinance, nor shall the said cash deposit be available to attachments in execution of any decree or recoverable under Order of any authority under any law for the time being in force.”.

Amendment of section 41 B, Ordinance LVII of 1962: (1) In the said Ordinance, in section 41 B, in sub-section (3),- after the word 'Directors' the words “and management” shall be inserted; for the words, “such person” the words, “an administrator” shall be substituted; and for the full stop, at the end, a colon shall be substituted and thereafter the following provisos shall be added, namely:

“Provided that the State Bank may, if it determines that circumstances warrant, remove an administrator and appoint another person or persons to be the administrator or may or may not appoint any administrator and itself exercise all such powers and perform all functions of the administrator:

Provided further that powers and functions of the administrator under this Ordinance shall be subject to such limitations and to such extent as may be determined by the State Bank and where the State Bank has chosen to exercise any of the powers or perform any functions itself, the powers and functions of the administrator shall be subject to such limitations and extent as may be specified by the State Bank.” ; and after sub-section (3) amended as aforesaid , the following new subsections shall be added, namely:

“(3A) Upon appointment of an administrator, the banking company, its directors, chief executive and officers shall submit the property, business, management and affairs of the banking company to the control of the administrator, and shall provide the administrator with all such facilities as may be required by him to carry on the business and to manage the affairs of the banking company.

(3B) During the period of administration, directors, chief executive and officers of the banking company shall not, directly or indirectly engage in any activities and management of the banking company as may be restricted or prohibited by the administrator or the State Bank, as the case may be.

(3C) The administrator may, with the approval of the State Bank and notwithstanding anything contained in the Companies Ordinance, 1984 (XLVII of 1984), or any other law, take any one or more of the following measures for rehabilitation of a banking company, namely: suspend, terminate or wind up any part of the activities of the banking company in or outside Pakistan in accordance with the provisions of this Ordinance; sell the assets of the banking company to any other banking company or entity on such terms and conditions as may be approved by the State Bank; terminate the employment of any officers or employees of the banking company, or replace any of its officers and employees, or engage such new employees, as deemed necessary; prepare a scheme of amalgamation or merger and submit the same for approval of the State Bank to merge the banking company with another banking company; re-organise the banking company by increasing its capital or selling its shares to new shareholders or reconstituting its Board of Directors in accordance with the provisions of this Ordinance; re-construct the banking company in such manner as considered necessary, including the closing down of businesses that are not viable or change its management; or take any other measures as may be approved by the State Bank to rehabilitate the banking company:

Provided that the administrator shall prepare scheme of reorganisation, reconstruction, amalgamation, sale of assets or winding up or any other resolution measure within sixty days of his appointment or such period as may be specified by the State Bank.”

Amendment of section 42, Ordinance LVII of 1962: In the said Ordinance, in sub-section (1), in clause (d) , in sub-clause (v) for the full stop, at the end, the semi colon shall be substituted and thereafter the following new clause shall be inserted, namely:”(e) without prejudice to the generality of this section or any provision of this Ordinance, if the State Bank is satisfied that one or more of the circumstances exist under which a banking company, – has become or is likely to become insolvent; has suspended or is likely to suspend payments as these fall due; has defaulted or is likely to default in making payments to depositors; is carrying on its business in a manner detrimental to the interests of its depositors, creditors or other stakeholders; has contravened any provisions of this Ordinance or any restrictions or condition imposed on its licensee; has engaged any director, chief executive or an officer of a banking company who is or is likely to be detrimental to the interests of the banking company or its depositors or otherwise undesirable; has created hindrance, delay or obstruction for the State Bank in performance of its supervisory functions; has wilfully destroyed, concealed or moved outside of Pakistan all or part of its assets, the administration, operation and books or records; has failed to comply with any direction given by the State Bank; has failed to meet capital adequacy or minimum capital requirements prescribed by the State Bank; has defrauded its depositors and creditors; is willfully engaged in or is being used for criminal activities; is part of a financial group which is under liquidation, or in respect of which a custodian, receiver, administrator or liquidator has been appointed; is a branch or subsidiary of a banking company whose licensee to carry on banking business in the country of its origin has been cancelled; has breached requirements under any document of commitment to the State Bank; or is otherwise in a situation or circumstance which in the opinion of the State Bank may materially impair the ability of the banking company to make payments, meet its obligations or otherwise continue its operations, the State Bank may, keeping in view the gravity of the situation and compliance behaviour of the banking company, from time to time, invoke any one or more of the following actions, namely: – Require the banking company to submit a plan of action to redress any discrepancies; require the Board of Director of the banking company to furnish documents of commitment; require the banking company to execute documents to commit to compliance with the measures prescribed by the State Bank and to secure the interests of its depositors; carry out any capital reduction and cancel any portion of shares of the banking company which is depleted or unrepresented by available assets or dilute the participation of the existing shareholders by issuing shares to such persons and at such consideration as may be determined by the State Bank or impose losses on shareholders by writing down their capital and any order passed by the State Bank under this sub-clause shall have effect notwithstanding the provisions contained in section 96 to 107 of Companies Ordinance, 1984 (XLVII of 1984) or any other law for the time being in force:

Provided that the State Bank shall provide an opportunity of being heard to the banking company or aggrieved person against which an order is proposed to be passed and the banking company or the aggrieved person shall have right of appeal before the Central Board of Directors of the State Bank; direct any shareholder of the banking company to divest or transfer the shares owned by him to a fit and proper person approved by the State Bank on such payment as may be determined by the State Bank; and transfer any assets and liabilities, in whole or part from the banking company to another banking company or other interested party or parties on such terms and conditions as may be determined by the State Bank”, Banking Companies (Amendment) Bill 2009 added.

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