New policy on share holdings in banks

The Central Bank this week, brought in new policies on share ownership in banks to promote better corporate governance and to address conflicts of interest that may arise due to large shareholding.

This plan was earlier exclusively reported by The Sunday Times FT.

The Central Bank said it issued new directions under the Banking Act to licensed banks to implement a new policy on share ownership in banks. Major areas of this policy are as follows:

*The maximum percentage of ownership permitted in the issued share capital carrying voting rights in a bank will be 15 per cent of the issued share capital (carrying voting rights). This limit will apply to acquisition or holding of shares by all categories of shareholders, individually or in group (as specified in the Banking Act) whether acquired/held directly or indirectly or through a nominee or acting in concert with any other categories of shareholders. However, in the case of licensed commercial banks, to acquire shares carrying voting rights in excess of 10 per cent requires prior approval of the Monetary Board given with the concurrence of Hon. Minister of Finance.

*However, the Monetary Board may grant permission to acquire shares in excess of 15 per cent in the case of a licensed bank which requires restructuring to avoid inadequacy of capital, insolvency or potential failure, subject to the condition that the ownership of shares so acquired shall be reduced to 15 per cent within a specified period as may be determined by the Monetary Board on a case-by-case basis, provided also that such period shall not exceed five years from the date of granting permission.

* Names of any shareholders who acquire shares of a bank in excess of the specified thresholds without the prior approval of the Monetary Board will not be entered in the share register of the bank.

* All shareholders who now hold shares carrying voting rights in excess of 15 per cent will be required to dispose of and/or reduce their shareholding to 15 per cent during the period not exceeding five years specified by the Monetary Board on a case-by-case basis. Within two months of the date of the issue of the new Directions (January 19, 2007), licensed banks should inform the Monetary Board of such shareholding and seek a directive from the Monetary Board as to the period within which the disposal and/or reduction of shares to the level of 15 per cent shall be carried out. Within two months of receipt of such information and request, the Monetary Board will specify the period for each category of shareholders and informs the relevant banks. The banks should convey the directive of the Monetary Board to the respective shareholder category. Voting rights of any category of shareholders who fails to comply with the directives of the Monetary Board will be limited to 10 per cent.