Banks and financial institutions promoters may soon be able to convert 100% equity into ordinary shares

Kathmandu January 5- Promoters of banks and financial institutions (BFIs) that have completed 10 years of operation may soon be able to convert all of their shares into ordinary shares if latest Bank and Financial Institution Bill tabled in Parliament is endorsed as it is.

As per the provision in the Bill, all the promoter shares can be offloaded and converted into ordinary shares if such a move does not affect the capital market, the banking sector and the entire financial sector. But Nepal Rastra Bank’s prior approval is required to convert promoter shares into ordinary shares.

This provision means BFIs that have completed 10 years of operation may conduct business without roping in promoters, who generally own huge portion of equities in financial institutions.

Currently, NRB has made it mandatory for promoters of BFIs to hold at least 51 per cent of shares. Another 30 per cent of the equities must be converted into ordinary shares, and there is an option to convert additional 19 per cent of promoter shares into ordinary shares.

The Bill, among others, has tried to tighten the noose around the board of directors of BFIs to improve governance in the financial institutions. If the Bill turns into law, chairman and members of the board of directors of BFIs won’t be able to serve in their positions for more than two terms of four years each. Independent director, on the other hand, cannot serve institution for more than a term.

The Bill, however, has removed a provision that bars central bank governor, deputy governors and executive directors from joining the board of BFIs within a year of their retirement or stepping down from the posts.

Although this restrictive clause is now featured in the NRB Bill, delay in signing of NRB Bill into law may provide an opportunity to top NRB officials to take undue advantage of the loophole.

The Bill has also institutionalized the practice of appointing the CEO of BFIs for a maximum of two terms of four years each.

The CEO should be a Master’s degree holder in management, banking, finance, economics, commerce, accounts, statistics, mathematics, trade administration or law or a Bachelor’s degree holder with at least 10 years of experience.

The new Bill has also incorporated a provision on consortium financing, which allows BFIs to extend loans by accepting projects or movable assets as collateral. But while extending consortium financing facility on the back of projects or movable assets, BFIs must sign pari-passu agreements, says the Bill. This pact entitles every bank to proportional stake in collateral if borrower defaults on loan payment. Source: THT