New law will allow banks to sue directors, CEOs for damages

If a bank incurs financial losses due to the irregularities or misconducts carried out by its chairman, director or chief executive officer, the bank will be able to sue the responsible officials for damages, according to the draft Banking-Companies (Amendment) Act 2023.

The draft, passed in the cabinet on Tuesday and is still a long way off to become law through parliament, also includes a provision to rein in the appointment of multiple representative directors by a shareholder (individual or industrial group) of the bank. This provision aims to bar any industrial group or business conglomerate from monopolising a bank.

As per the existing law, banks are able to remove their directors or chief executive officers from their respective positions if they are found to be involved in corruption or irregularities. But there is no provision which enables the banks to cover financial losses caused by the responsible officials.

That is why, the Anti-Corruption Commission filed a corruption case against the then-managing director of Sonali Bank for his involvement in the Hallmark loan scam, but there was no case lodged seeking compensation from the MD.

According to the Bangladesh Bank sources, a shareholder of a bank (a company or an individual) can appoint representative directors to the board as per an existing provision in the Bank Company Act. But this provision is being abused by some shareholders as it does not specify the highest number of representatives a shareholder can appoint.

The draft act cleared the confusion with a provision saying a shareholder cannot appoint more than two directors from his/her affiliated companies to the bank's board. However, no more than one individual representative director can be appointed on behalf of any institution or company to the board.

The central bank sources said such a provision is necessary to curtail the dominance of any single industry group in any bank.

According to the draft law, no individual shareholder can appoint a representative director to the board on his behalf. That is, if a person owns the shares of the bank, no other person can be appointed as a director as his representative.

Arguing for adding such a provision, the Bangladesh Bank told the Cabinet that in accordance with international best practices and Basel principles, the addition of such a clause is necessary to avoid conflicts of interest between competing companies or institutions, to prevent misappropriation of financial sector assets and to establish order and good governance in the banking sector. 

In the existing law, no bank director can be the director of any other bank or financial institution at the same time. However, there is an opportunity for a bank director to become the director of an insurance company for a maximum of two terms, although according to the insurance law enacted in 2010, no director of an insurance company can be a director of a bank company.

In the amendment draft of the Bank Company Act, the opportunity of any bank director to simultaneously hold the position of director of an insurance company has been revoked.

The existing law does not say anything about whether a director can also be a director of a bank's subsidiary company. The draft law clarified that a director cannot be a director in any subsidiary company.

According to the draft law, if a person is a director of a bank, he/she cannot be a director of any other bank, financial institution, insurance company or any subsidiary company of the bank at the same time.

Although the existing law provides for the appointment of alternate directors, nothing is said about the tenure and qualifications of the alternate directors. These issues will be specified in the amended law.

The Bangladesh Bank told the Cabinet that since there is nothing in the law regarding the tenure of an alternate director, many times the original director never comes to the country, or stays out of the country for most of his tenure. Moreover, a few banks have taken permission from the Bangladesh Bank to conduct board meetings through video conference.

To stop this, the draft law states that if a director is abroad for at least three continuous months, due to his absence, the board can appoint an alternate director at most once a year. The same conditions for the appointment of directors shall be applicable to the appointment of alternate directors.

According to the central bank, banks in many countries are subsidiaries of other holding companies, having two types of boards, namely, management board and supervisory board. Directors on these boards operate in a unique way and serve on a fixed salary.

But the structure is different in Bangladesh. Bank directors here take profit against the shares they hold and receive an honorarium for attending board meetings.

In this context, according to the guidelines of the "Corporate Governance Code" issued by the Bangladesh Securities and Exchange Commission, a Nomination and Remuneration Committee (NRC) has been formed as a subsidiary committee of the board consisting of board members to formulate policies on the qualifications, suitability, salary, and honorarium of the bank's directors and high-level officers and their responsibilities. The Bangladesh Bank thinks that it may create complications in compliance.

Therefore, a new provision has been added to the draft law so that the Bangladesh Bank may issue instructions from time to time regarding the scope of work of its board and board committees in the interest of proper management and operation of any bank company.

According to the Bank Company Act, 1991, bank directors cannot take any allowance other than an honorarium for attending meetings. According to a circular issued by the Banking Regulation and Policy Department (BRPD) of the central bank in 2013, no board member can be involved in the appointment, promotion, transfer and disciplinary action of the officers below two posts of the chief executive officer.

The new law will establish the Bangladesh Bank's control over the banks' subsidiary companies. A new clause has been added to it saying that for whatever purpose the bank forms a subsidiary company, it cannot invest more than the amount determined by the central bank as the capital of the subsidiary company.

The central bank's argument in this regard is that the subsidiary companies have 100% or more than 50% shares or funds of the parent company. In this case, various types of irregularities are taking place as the central bank has no instructions for the subsidiaries of the bank.

Under the new law, the Bangladesh Bank will issue a circular regarding the qualifications and suitability of directors and chief executive officers of subsidiary companies of banks.