Banks face compliance hurdles under BB's new nominated director rules

Bangladesh Bank's directives to curb excessive direct or indirect control of multiple banks by single corporate entities through shareholdings and nominated directors have created immediate compliance challenges for some banks with shareholder-nominated directors.

The banks are now working to bring their boards in line with the new regulatory caps.

Demonstrating the direct impact of these measures, the City Bank board decided on 29 September to cancel its Extraordinary General Meeting (EGM) originally scheduled for 4 October. The bank stated it needed to review its agenda in light of the central bank's recent directives. It had originally planned to seek shareholders' approval to raise its authorised capital to Tk3,000 crore from Tk2,000 crore.

The cancellation shows the operational and compliance hurdles facing institutions with shareholder-nominated directors under Bangladesh Bank's 17 September circular. The new regulations set strict limits on corporate shareholdings and conditions for appointing representative directors.

Mashrur Arefin, managing director of city bank, told the business standard, "As the central bank has issued a circular regarding 'nominated directors' or 'representative directors' appointed to a bank's Board by corporate shareholders, we need to review its implications carefully."

"We do not have many directors on our Board and we currently have nominated directors representing two Bangladeshi companies and one representing IFC. In light of this circular, we need to thoroughly review the number of directorship positions permitted for our bank," he continued.

"As for increasing the authorised capital, we still have time and are in no hurry," Mashrur added.

Considering these two factors, the bank has decided to reassess their strategy and possibly hold the EGM in December or January, the banker said.

Several other banks with shareholder-nominated directors are also reviewing their positions in light of the circular, according to people familiar with the matter.

The Bangladesh Bank circular was issued to strengthen transparency and stability in banks' ownership structures, prevent excessive investment by shareholder companies relative to their financial capacity, improve the competence and professionalism of representative directors and protect depositors' interests.

Under the new rules, a company cannot hold shares in one or more banks with an acquisition value exceeding half of its net assets. Companies that exceed the limit must bring their holdings within the prescribed threshold within six months.

The circular also requires a representative director nominated by a shareholder company to be a director or managing director of that shareholder company. In addition, the nominating company must hold at least 2% of the paid-up capital of a public limited company, or 20% of the paid-up capital of another type of company, in its own name and maintain the holding throughout the nominee's tenure.

Bangladesh Bank officials said the rules were introduced partly to prevent a single company from exercising excessive direct or indirect control over multiple banks through shareholdings and nominated directors.

Bangladesh Bank Executive Director and Spokesperson Arif Hossain Khan told The Business Standard, "The decision was taken to prevent single entities from indirectly dominating multiple banks through nominee directors."

In the past, paper companies were used to capture board seats and divert loans to related entities without taking responsibility when debts defaulted – a loophole exploited during the previous regime by groups like S Alam to take over seven banks.

Addressing concerns over foreign and institutional investors, Arif Hossain confirmed that foreign institutions such as the IFC and non-profit parent entities will be granted waivers or excluded from the restriction so as not to hamper foreign investment. While foreign documentation will be evaluated case-by-case, local commercial firms failing to meet the criteria will face strict enforcement, including the removal of their nominated directors from bank boards.

According to central bank sources, the new provision regarding the appointment of representative directors will not apply to BRAC Bank, Community Bank, Shimanto Bank, and Trust Bank, as the majority of their shares are held by non-profit organisations or trusts.

Tareq Refat Ullah Khan, managing director of BRAC Bank, said that the directive targets commercial limited companies attempting to enter bank boards without due diligence, adding that the framework will instill much-needed discipline into bank shareholding structures.