Proposed change to single shareholder limit in banks raises alarm
The budget proposal to revisit the single shareholder limit in commercial banks has raised alarm bells as to whether powerful groups will regroup to raid commercial banks as was seen less than a decade ago.
This proposal on shareholder limit now at 10 per cent and with special approval by the Monetary Board up to 15 per cent hasn’t drawn a favourable response from the Central Bank (CB) as well. “To increase single shareholder limits in commercial banks isn’t good corporate governance. The present limits on commercial bank holdings have improved corporate governance when compared with the past,” a senior CB official told the Business Times adding that the CB will do a thorough study on this.
The Business Times reliably learns that with last week’s budget proposal, the commercial banks’ single shareholder limit will be relaxed up to 20 per cent with special Monetary Board approval. A Treasury official told the Business Times that this limit is likely to be changed so that a maximum of two shareholders can hold 20 per cent each in a commercial bank. Now with special approval, a single shareholder can own 15 per cent and any number can hold this amount.
Presently, under Section 12 of the Banking Act an individual, partnership or corporate body shall not either directly or indirectly or through a nominee or acting in concert with any other individual,
partnership or corporate body acquire a material interest in a commercial bank without the prior written approval of the Monetary Board. The CB brought in minimum ownership of banks to promote better corporate governance and to reduce the concentration of ownership and to address conflicts of interest that may arise due to large shareholdings.
Industry-wide voluntary consolidation is a central theme in the 2017 Budget for the banking sector, the CB official said adding that by increasing share ownership they want to encourage sector consolidation which didn’t happen as predicted in the last budget though it was proposed at the time.
This will put banks like DFCC, NDB and Seylan back in the debate for consolidation, analysts said.
An industry analyst said that mandatory ownership limits will matter less, if mandatory governance rules ensure autonomy of boards and management, while defining their responsibilities and guaranteeing accountability. “Relaxing ownership limits either in theory or in practice, without enforceable governance, is a high risk strategy,” he added.
Some say that there may be political reasons behind these proposals. “Are these made purely from an investment point view or is it to influence the board, or direct lending of these institutions?” the analyst asked.
He said that special sanction by the CB seems to be more the rule than the exception now and that may be why this new budget proposal was introduced.
The last instance in special approval by the Monetary Board was in 2014 and sought when TPG, a US-based global private investment firm obtained a 70 per cent stake in Union Bank (UB). “We welcomed TPG’s investment through its affiliate Culture Financial Holdings Ltd in UB as it will make this bank stronger,” then CB Governor Nivard Cabraal said. TPG invested US$ 117 million in the local bank.
In UB – TPG, there’s no concentration risk, was CB’s stance at the time and Mr. Cabraal had said that it’s one thing to have a large investment in one bank and ‘quite another’ to have large investments in several banks. Also industry analysts opine that exception to the minimum shareholder limits should be allowed in the case of a start-up such as Cargills Bank (Cargills Ceylon has 40 per cent and CT Group has 25 per cent) or in the case of a distressed bank such as UB.
The CB sanctioned John Keells to retain its 29.9 per cent in NTB a few years ago, letting Central Finance, being the promoter hold a 20 per cent stake and businessman Dhammika Perera’s 29.9 per cent in Pan Asia which was allowed as well. He has 14.95 per cent in Sampath through his company Vallibel 1 PLC.
Harry Jayawardena (collectively) has surpassed the single shareholder limits in two banks. A test case was when his direct and indirect shareholdings of Commercial Bank amount to 42.6 per cent as at November 2005 when four Ceylon Bank Employees Union (CBEU) members filed a petition in the Court of Appeal seeking an order to prevent Mr. Jayawardena from acting directly or indirectly from casting a vote at any shareholders meeting on the basis of shares exceeding 10 per cent of the issued share capital of the Commercial Bank and the court restrained the Distilleries Corporation (DCSL) and Sri Lanka Insurance Corporation (SLIC), together with related parties including DFCC limiting their voting rights to 10 percent in total.
Mr. Jayawardena has 17.91 per cent through Milford Exports, Stassen’s and Distilleries but has been limited to 10 per cent voting rights. “So with special sanction he along with any other entity can increase their holding if the minimum limit is increased and then influencing these entities is just a step away,” a senior banker added.
Last month, Mr. Jayawardena via Stassen Exports, got an interim order from the Commercial High Court restraining HNB from proceeding with an Extraordinary General Meeting (EGM) to get shareholder approval for the private placement valued at US$ 50 million (over Rs. 7.2 billion) until the final determination saying that this will also result in a depreciation of share value and would therefore directly hurt existing shareholders.
Some say that the private placement was a bid to dilute the government shareholding at nearly 30 per cent and to prevent any attempt to vote out the directors appointed by the previous regime. Sri Lanka Insurance Corporation (Life and general), the Employees’ Provident Fund (EPF) and the National Savings Bank, hold 9.6 per cent, 4.96 per cent and 2.89 per cent of shares in HNB.
Mr. Jayawardena through HNB has 12 per cent in DFCC. The Bank of Ceylon has 14.35 per cent in DFCC. In Commercial, DFCC has 15 per cent. “So there’re so many contraventions than compliances to the rules,” another analyst said.
Among the budget proposals, increasing minimum capital threshold levels of both Commercial Banks and Specialised Banks to Rs. 20 billion and 7.5 billion is with the aim of promoting industry wide voluntary consolidation. As per analysis three listed commercial banks – NTB, Union Bank and Pan Asia and two listed specialised banks – State Development and HDFC will be directly impacted by this new proposal.
Some years ago, the CB in a statement said that share ownership concentration in banks, per se, is neither new nor illegal. It has its advantages as well as disadvantages. “The Central Bank, like many other banking regulators around the world, places heavy emphasis on prudential management of banks on sound corporate governance principles to achieve financial system stability. The current Banking Act contains provisions in respect of share ownership in banks in Sri Lanka by connected parties. The share ownership of investors in the three banks in question has been examined by a team of professionals in relation to these provisions, and it has been found by the examinations conducted so far that there has not been a violation of law in respect of which enforcement action can be taken by the authorities.”