Tuesday, May 21, 2024

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Dhaka Tribune

Bank Merger guidelines: A critical review

I wish to lay down certain contradictions and gaps which may have to be addressed in further clarificatory circulars

Update : 18 Apr 2024, 03:57 PM

Bangladesh Bank published guidelines for the amalgamation or merger of banks as part of its ongoing endeavour to merge weak banks with strong ones.

In the meantime, news has also surfaced of five such proposed mergers which are now under consideration.

However, none of the five have yet been reported to move to any substantial formal procedure as of yet, with the Exim Bank-Padma Bank merger only having an MOU so far.

The Companies Act 1994 is the primary law governing all amalgamations in Bangladesh generally.

However, for a regulated industry such as banking, guidelines from the regulator of banks, i.e. Bangladesh Bank guidelines for the amalgamation process were a necessity and Bangladesh Bank has duly delivered on their duty by publishing such guidelines on April 4, 2024.

However, while the guidelines appear comprehensive, covering in detail the requirements and procedures for both voluntary and involuntary mergers of banks, there are significant unanswered questions.

These questions need to be addressed before going ahead with the process.

The questions I aim to raise are, first, from a reading of the guidelines. I wish to lay down certain contradictions and gaps which may have to be addressed in further clarificatory circulars.

Second, news of how the regulator is handling the mergers so far also seems to contradict some provisions in the guidelines, which I also would like to point out.

Can mergers be forced?

The first issue that jumps out is that as per the guidelines, for a voluntary amalgamation, the boards of both banks must have taken a decision to merge and also made a notification of the board decisions to the Securities and Exchange Commission as price sensitive information.

So far, it is not clear whether all ten banks in the five merger proposals have actually consented in the guideline-mandated way to the initiation of the merger process. Some news reports suggest that they have not. 

That is not to say that a bank amalgamation cannot be forced. However, for a forced amalgamation the law stipulates a procedure whereby Bangladesh Bank can force a weak bank to merge with another bank if it has failed to achieve some indicators after having been directed by Bangladesh Bank to carry out some corrective measures under the Prompt Corrective Action (PCA) Framework.

Furthermore, a bank would get 12 months to carry out such corrective measures before they can be forced to merge. So far, reports do not suggest that any of the weak banks have been given such time before their mergers have been allegedly ‘forced’.

Another question that the guideline does not answer is how and under what conditions a strong bank can be forced to merge with any other bank. An apparent reading of the guideline suggests that even a strong bank can be forced to merge with a weak bank.

However, here the guidelines do not have any legal backing from the Bank Companies Act which gives Bangladesh Bank the authority and jurisdiction to force a strong bank in any way to merge with another bank.

Furthermore, the apparent authority that Bangladesh Bank gives itself (without backing of law) to force a strong bank, seems rather unequitable considering the fact that a well-performing bank and its shareholders and depositors should have every right to go about their business as it is and have the choice not to take on the risks associated with acquiring a weak bank along with its employees and defaulter borrowers.

Another ambiguity in the guidelines for forced mergers is regarding how Bangladesh Bank will force either banks’ shareholders to approve the amalgamation.

The guidelines require this approval and so does the Companies Act. But it is not clear what will happen if a bank who has been compelled by Bangladesh Bank to merge then cannot obtain the requisite affirmative votes of its shareholders, without which the Company Bench of the High Court ultimately cannot approve the amalgamation scheme.

Who does due diligence?

From a plain reading of the guidelines, it appears that Bangladesh Bank has given itself the mandate to do financial and legal due diligence of the transferor bank or weak bank both in the case of voluntary and involuntary amalgamations.

The guidelines stipulate that the due diligence will be done by one or several firms in BB’s panel of firms and costs will also be borne by the central bank.

This is rather counterintuitive and contrary to established practice in mergers and acquisitions. The established practice is that an acquiring entity carries out due diligence of its target entity to ensure the true financial and legal health of the target entity, that all its legal and compliance affairs are in order and find any red flags which might be contrary to its interests.

The whole purpose is to ensure that the acquiring entity’s present and future interests are protected and a proper valuation is reached.

However, when due diligence is to be carried out by a firm which has no loyalty or accountability to the acquiring entity, there is no certainty that they will have the acquirer’s interests in mind.

In this way, the due diligence process appears to be a mere formality and not of any substantive value at all.

The World Bank has also called out this gap and asked for thorough assessment of the asset qualities of the bank in order to protect investor confidence.

It is not clear from the guidelines whether the acquiring bank is completely barred from doing its own due diligence, but perhaps this can be clarified.

For a fair and transparent acquisition, the acquiring bank must also be given the right to do its own due diligence so as to protect its shareholders’ and depositors’ interests.

What happens to management and employees?

The guidelines at first seem clear that the senior management of the transferor bank meaning its managing director, additional managing director(s) and deputy managing director(s) cannot hold any positions in the amalgamated bank.

This is perhaps with the purpose to keep the failed management away from the affairs of the bank.

However, in the next line, it is stated that the new board in its discretion can provide fresh appointments to any of them in any position. This would mean that simply a fresh appointment letter can completely nullify the initial restriction.

In case of voluntary amalgamations, it has been stipulated that the employees of the transferor bank cannot be terminated due to redundancy at least for a period of 3 years.

First, this begs the question of whether it makes business sense for an acquiring entity to cover the salaries and benefits of a whole other employee base when the main purpose of the amalgamation may have been cost-cutting and streamlining of operations.

Second, it is not clear if the said employees can be terminated for reasons other than redundancy, such as misconduct, or even without reason and simply with notice pay in compliance with the Labour Act.

This issue begs clarification since a huge number of employees are in line to be affected by these mergers.

How to prevent safe exit of perpetrators?

A big question being asked by critics about the proposed mergers is whether the mergers will provide a safe exit to members of the management and Board whose collective or individual corruption may have been the primary reason for the poor performance of the weak banks.

Proper financial and legal due diligence of a transferor entity would usually unearth irregularities, but with Bangladesh Bank retaining control of the due diligence process, it is not clear if these irregularities, if found, will see the light of day.

This is perhaps cemented with a confidentiality obligation on all parties contained in the guidelines, meaning that irregularities, even if found, may not be revealed.

In light of public concerns, it is perhaps prudent for Bangladesh Bank to clarify with an amendment that if any irregularities, whether or not amounting to corruption, are found during the due diligence process or even after the amalgamation is completed, there will be no bar to initiating disciplinary and even criminal action against perpetrators. 

This is very important for accountability in the process and regaining public confidence in the banking sector as a whole.

Way forward

Bangladesh Bank should certainly be commended for taking the initiative to address the long standing concerns regarding underperforming banks and also for publishing the guidelines for the amalgamation of these banks.

At this stage, there is still opportunity and scope to address the concerns above and to move forward with prudence and clarity to protect the interests of all direct and indirect stakeholders.

 

Saqeb Mahbub, Barrister-at-Law, is partner at leading law firm Mahbub & Company. He can be reached at [email protected]

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