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    • How the 2% shareholding rule turns businessmen’s clubs into bank boards
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    How the 2% shareholding rule turns businessmen’s clubs into bank boards

    Umito Posted on

    Industry insiders say the Bangladesh Securities and Exchange Commission (BSEC) has seriously undermined corporate governance, strengthened family control over banks and ousted competent individuals from bank boards simply because they do not did not reach the shareholding threshold.

    October 28, 2024, 7:30 a.m.

    Last modification: October 28, 2024, 7:35 a.m.

    Infographic: SCT

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    Infographic: SCT

    Infographic: SCT

    Following the 2010 stock market crash, the regulator introduced a new directive next year requiring sponsors and directors – excluding independents – to hold at least 2% of a company’s shares to be eligible to become a director . Collectively, sponsors and directors were required to own at least 30% of the company’s shares.

    Investors initially welcomed the move, hoping it would reinvigorate the stock market.

    Directors, especially those who did not already hold the required shares, were expected to buy more to retain their board positions or seek new directorships, leading to a market rally .

    However, despite the optimism and stability of the country’s macroeconomic conditions, the stock market remained sluggish for almost a decade, showing little improvement until 2020. Even though the 2% participation rule had little impact, positive impact on the market, it left a lasting negative mark on Bangladesh. banking sector.


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    Industry experts say the Bangladesh Securities and Exchange Commission (BSEC) has seriously undermined corporate governance, strengthened family control over banks and ousted competent individuals from bank boards simply because they do not did not meet the shareholding threshold – a rare requirement on a global scale.

    Consider the case of Mr Syeduzzaman, a respected former finance minister and chairman of Bank Asia from 1999 to 2008. Despite his vast experience, he was unable to continue as a director because he held less than 0.4%. shares of the bank.

    Similarly, Commodore (retd) Mohammad Ataur Rahman, who headed Islami Bank Bangladesh Limited for 13 years as chairman, owned only Tk 35,000 worth of shares, while Shah Abdul Hannan, another former chairman of ‘IBBL, held only Tk 25,000 worth of shares. at the bank.

    Critics, including Muhammad Abdul Mannan, chairman of First Security Islami Bank and former managing director of Islami Bank, call the 2% rule a “black law” that has caused irreversible damage to the banking sector.

    According to Mannan, this requirement has concentrated ownership of the banking sector in the hands of a few powerful families, thereby compromising the interests of depositors.

    “If the rule did not exist, we would not have seen certain groups and individuals taking over banks one after the other. Ownership would still be in the hands of the public,” Mannan said.

    He also said that BSEC had handed over the banking sector to a few families by implementing this rule, thereby endangering corporate governance and the banking system as a whole.

    For example, he said, 70% of the deposits of First Security Islami Bank were lent to 200 people in Chattogram, 29% of the deposits were given to some people in Motijheel and Gulshan, and the remaining 1% for the rest of the country.

    “This is the worst form of capitalism. In collaboration, these oligarchs lend each other the public’s deposits while ignoring the rules,” Mannan said.

    Atiur Rahman, former governor of Bangladesh Bank, again recalls the case of M Syeduzzaman, who was unable to join the board of directors of Bank Asia due to the new shareholding regulations.

    “He contacted me and I raised the issue with the finance ministry, but nothing came of it,” Atiur told the Business Standard.

    AKM Shaheed Reza, an industrialist and former chairman of Mercantile Bank, also criticized the rule, calling it a “bad decision” that prevents talented individuals from joining boards due to insufficient shareholding.

    “By imposing this large shareholding requirement, an oligarchic system was created,” Reza said, pointing out that before the rule change, directors were only required to hold shares worth Tk10,000. to qualify.

    Reza argued that the 2% rule is one of the main factors behind the deterioration of Bangladesh’s banking sector. He said the rule, introduced by the previous government to boost the stock market, had backfired.

    “What was the result? Shares of many banks are now trading below their face value,” he said, adding that this rule has instead led to the creation of monopolistic cartels within the banking sector.

    Reza urged the caretaker government to repeal the 2% shareholding requirement and suggested a new provision – requiring directors to hold shares worth Tk50 lakh for at least a year – as a more effective alternative.

    “This change is crucial because currently, the money that sponsors and directors have in a bank is at best 2-3% of the bank’s total deposits. Yet they act as if they are the owners of the bank “, Reza noted.

    Infographic: SCT

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    Infographic: SCT

    Infographic: SCT

    No incentives for qualified people

    Anis A Khan, former managing director of Mutual Trust Bank, pointed out the stark contrast between bank ownership in Bangladesh and Western countries like the United States and those in Europe where big companies own banks.

    “In Bangladesh, private banks are owned and controlled by individuals, which undermines good governance and allows vested interests to prevail,” said Anis, who has extensive experience working with domestic and foreign banks.

    Anis also noted that foreign banks appoint highly qualified and competent individuals to their boards as independent directors, providing them with substantial remuneration for their services. In contrast, independent directors of Bangladeshi banks receive only Tk 10,000 per board meeting, compared to Tk 8,000 a decade ago.

    “There is little incentive for qualified people to join a bank board for such a small amount of money,” Khan concluded.

    Faruq Ahmad Siddiqi, former chairman of BSEC, told TBS that the 2% requirement has effectively prevented many domain experts and seasoned professionals from serving on the boards of listed companies as they are not major shareholders .

    “The consequences of transforming bank boards into businessmen’s clubs are now evident,” he added.

    Faruq Ahmad also noted that mandatory collective participation of 30% by sponsors and directors could have addressed key issues: ensuring sufficient ownership, boosting demand for listed shares and maintaining accountability.

    Rezaul Karim, executive director and spokesperson of BSEC, said that after the 2010 debacle, all stakeholders except listed companies were in favor of a minimum of directors’ participation in a company, and the regulator acted accordingly.

    “A written petition by the sponsor directors was filed when BSEC was pushing for compliance in the middle of the last decade. But the petitioners were unsuccessful,” he added.

    What the then BSEC president said

    M Khairul Hossain was chairman of BSEC when the 2% shareholding requirement was introduced in November 2011. He held the position until 2020.

    Khairul explained that it was implemented in response to popular demand from all stakeholders except the listed companies themselves.

    “Investors were worried that many promoters were selling their shares at inflated prices in 2010, decreasing interest in their companies. And that was a real problem,” Khairul told TBS.

    He noted that some promoters initially filed a motion against the settlement. However, investors joined the case in support of the regulations, and the court ultimately ruled against the developers.

    Highlighting the impartial application of the rule, the former BSEC chairman cited the example of Awami League leader Abdul Jalil, who lost his post as a director of Mercantile Bank due to the demand for 2% shareholding.

    “It was about setting priorities based on circumstances, not targeting individuals,” Khairul said. “As contexts evolve, regulations can be modified through extensive stakeholder consultations.”

    Independent directors run most of India’s private banks

    ICICI Bank, one of India’s largest private sector banks, has a 13-member board of directors, including 10 independent directors, including the chairman. The other three members are senior executives of the bank, including the managing director.

    A similar structure is found at HDFC Bank, which has six independent directors out of 12 members in total. Additionally, the board has two non-executive directors, providing an independent perspective without any material financial interest in the company, allowing them to offer impartial oversight and decision-making. It should be noted that the presidents of both banks serve part-time.

    At Kotak Mahindra Bank, where promoter Uday Kotak has a significant stake, the bank chairman is an independent director.

    This diversified governance structure is made possible by a significant presence of institutional investors, who hold the majority of stakes in many private banks in India.

    For large banks like these, foreign institutional investors are often the largest shareholders, holding between 40 and 45% of the total shares. Domestic institutional investors, such as mutual funds and insurance companies, also hold significant stakes.

    In October last year, the Reserve Bank of India mandated that private sector banks have at least two full directors in addition to the managing director. This requirement was deemed necessary due to the increasing complexity of the banking sector.

    Umito
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