What Bangladesh Bank’s new rules for nominee directors mean
New rules require nominee directors to hold a minimum stake in the shareholder company, strengthening accountability in bank boards.
Bangladesh Bank has tightened the rules for appointing nominee directors to bank boards. But what exactly is a nominee director, and why has the central bank introduced these requirements?
What is a nominee director?
A nominee director is a person appointed to a bank's board to represent the interests of a shareholder company.
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For example, suppose Company A owns a significant number of shares in Bank B. Company A may nominate one of its directors to sit on Bank B's board and represent its interests.
Under the new rules, however, that person cannot simply be an employee or associate of the business group. The nominee must be a director or managing director of the shareholder company and must personally own a minimum amount of shares in that company.
What has Bangladesh Bank changed?
For a nominee representing a listed company, the nominee must personally own shares equivalent to at least 2% of that company's paid-up capital.
For a nominee representing an non-listed company, the requirement is much higher — at least 20% of the paid-up capital.
The shares must be free from encumbrances, meaning they cannot be pledged, mortgaged or otherwise used as security for a loan or other obligation.
The nominee must continue to maintain this shareholding throughout their time on the bank's board.
Bangladesh Bank's approval will also be required before a nominee director is appointed, reappointed or replaced. The bank will have to submit documents proving the nominee's ownership of the shareholder company.
Why has Bangladesh Bank done this?
The main issue is who a nominee director actually represents.
In the past, according to officials cited in the TBS report, there were cases where business groups appointed their employees as nominee directors through shareholder companies. This raised questions about whether those directors were genuinely representing the shareholder company or primarily serving the interests of the wider business group.
The new requirement creates a more direct link between the nominee and the shareholder company: the nominee must actually have a significant personal ownership stake in that company.
Bangladesh Bank says the measures are intended to improve transparency and stability in banks' ownership structures, strengthen directors' accountability and protect depositors' interests.
There is another important restriction
A company cannot invest in bank shares worth more than its own net worth.
In simple terms, a company with net assets worth Tk100 crore cannot hold bank shares worth Tk150 crore. If its holdings exceed the limit, it will have six months to bring them within the prescribed level.
Who could benefit?
The immediate beneficiaries are potentially bank depositors and the banking system as a whole.
The idea is to make bank ownership and board representation more transparent and ensure that people sitting on bank boards have a genuine ownership relationship with the companies they represent.
The rules could also make it harder for a business group to use employees or close associates as nominee directors without those individuals having a meaningful ownership stake in the shareholder company.
Ultimately, Bangladesh Bank is trying to ensure that people influencing decisions on a bank's board have a clearly identifiable relationship with the shareholder they represent and are subject to greater accountability.
