Bangladesh Bank Caps Corporate Bank Holdings at Net Worth
The central bank has mandated that corporate entities reduce their bank shareholdings to match their net worth within six months, while tightening rules for board nominees.
Corporate entities in Bangladesh must cut their bank shareholdings to match their own net worth within six months. The Bangladesh Bank issued this directive on September 17 to curb excessive leverage by business groups. The new rule applies to both single and multiple bank companies.
Companies currently holding shares above this threshold face a strict compliance deadline. The limit is calculated based on acquisition cost rather than market value. This move aims to align risk exposure with the financial capacity of the shareholder companies.
Stricter rules for board nominees
The central bank has tightened eligibility criteria for representative directors on bank boards. Nominees must serve as managing directors or directors of the shareholder company. They must also hold a minimum equity stake of 2% in listed entities or 20% in other company types.
Banks must now seek prior approval from the central bank for any changes to these director positions. Proof of the nominee's equity stake is required for submission. This requirement replaces the previous practice where appointments were made without such verification.
Addressing board independence concerns
Officials cited past instances where business groups appointed employees or associates as nominee directors. These individuals often lacked a direct financial stake in the shareholder company. This raised concerns about the independence of the board and the prioritization of group interests over depositor safety.
The new conditions ensure that nominee directors have a genuine ownership relationship with the shareholder company. This makes it easier to verify whose interests are being represented on the board. The measures are designed to enhance transparency and stability in bank ownership structures.
Immediate effect of the directive
The directive took effect immediately upon issuance. Banks are required to review their current board compositions for compliance. The six-month grace period for reducing shareholdings begins from the date of the circular.
According to GN auto markets/bonds: corporate bonds, this regulatory shift impacts the structure of corporate investments in the banking sector. It restricts the ability of large business conglomerates to control banks through disproportionate shareholdings. The focus remains on protecting depositors and ensuring prudent risk management.
