Bangladesh Bank has imposed new conditions regarding the appointment of representative directors on the boards of banks.
From now on, to become a representative director of a bank on behalf of a shareholding institution, the individual must be the managing director (MD) or a director of that institution.
At the same time, it has been made mandatory for the nominated person to hold a specified amount of shares under their own name in the respective shareholding institution.
Bangladesh Bank issued a circular in this regard on Thursday (September 17).
According to the new directive, a person nominated as a representative director must hold at least 2% of the paid-up capital under their own name in the case of a listed public limited company.
For non-listed companies, they must hold at least 20% unencumbered shares of the paid-up capital of the respective institution under their own name.
This shareholding must be maintained throughout the entire tenure as a representative director.
Bangladesh Bank stated that these conditions have been imposed to ensure transparency and stability in bank ownership structures, control excessive investments relative to the financial capacity of shareholding institutions, ensure the accountability and role of representative directors, and protect depositors' interests.
The circular states that no company can hold shares in single or multiple banks worth more than its net worth.
If an institution's bank shareholding exceeds the newly prescribed limit, it must be brought down to the specified limit within six months.
The central bank believes this will reduce opportunities for investments that are disproportionate to an institution's financial capacity when taking ownership stakes in banks.
Under the new rules, approval from Bangladesh Bank must be obtained prior to the appointment, re-appointment, or change of a bank's representative director.
When applying for approval, proof of the nominated person's status as a director or MD of the shareholding institution and evidence of their required shareholding in that institution must be submitted.
The new directives must also be followed for the re-appointment or change of representative directors previously appointed to bank boards on behalf of shareholding institutions.
Additionally, Bangladesh Bank has instructed that the contents of the new circular be presented at bank board meetings to inform directors and relevant parties.
Banks have also been asked to notify their officers and shareholders about the matter.
Preventing employees from becoming representative directors
Relevant Bangladesh Bank officials noted that in the past, banks controlled by various business groups saw appointments of representative directors who were merely officers or employees of those groups.
This raised questions regarding the independence, genuine representation of ownership, and accountability of representative directors.
According to them, the new conditions were imposed specifically to ensure that no one can sit on a bank's board as a representative director simply by being an employee or close associate of a business group.
Central bank officials further added that establishing a genuine ownership and interest link between the representative director and the shareholding institution will make it easier to verify whose interests are being represented on the board.
Furthermore, making personal share ownership mandatory for representative directors will increase accountability in board decision-making.