Central bank unveils Acquisition Bylaw

KATHMANDU, APR 21 -

Nepal Rastra Bank (NRB) has introduced Acquisition Bylaw including a provision of forceful acquisition in the event that the central bank finds it necessary.

Commercial banks, development banks and finance companies can acquire any banks and financial institutions (BFIs), while ‘D’ class FIs (micro-finance institutions, non-government organisations and cooperatives) can acquire other ‘D’ class FIs only, according to the bylaw introduced on Sunday.

Under the forceful acquisition provision, NRB has put forth certain conditions. If a single group has promoted more than none BFIs, the central bank may force them to be acquired by other BFIs.

BFIs failing to lower non-performing loans below 5 percent for three consecutive years, those facing prompt corrective action for at least three times, and those failing to pay liabilities may also be subject to forceful acquisition.

The central bank may also force BFIs to be acquired if they fail to raise paid-up capital to the required level, issue public shares timely and if the issued shares are not subscribed.

Other circumstances that may prompt NRB to force BFIs to be acquired are deteriorating corporate governance due to tussles among board directors, and when interests of depositors, shareholders and service seekers are hampered.

NRB Spokesperson Bhaskarm-ani Gnawali said the provision of forceful acquisition was put in place considering increasing incidents to which only a forceful acquisition would be an answer.

“For example, if a financial institution is on the brink of failure and may have to be liquidated, its acquisition by a powerful institution might be an alternative mechanism,” he said. “The central bank generally does not want a forced acquisition, but it may be forced to take such a measure under certain conditions.”

The central bank said the bylaw was introduced to create an environment where institutions with big net worth could acquire institutions with low net worth and those in trouble. But after an acquisition, the capital adequacy ratio of the acquiring BFI has to meet the NRB requirement.

The acquirer could make payment to promoters and shareholders of the acquired institution either in cash or stock, but it cannot acquire an institution partially. If an institution fails to close a planned acquisition within the deadline fixed after the final NRB approval, legal action would be taken against it after cancelling the final approval, according to the bylaw. The bylaw has also fixed acquisition procedures. A due diligence audit (DDA) of the institution to be acquired has be carried out after getting approval from its annual general meeting. Then, the two sides have to sign a memorandum of understanding and take final approval from the central bank.

The bylaw has announced a number of facilities to promote acquisition. An acquirer would be offered time to regularise its capital structure as prescribed by the central bank and bring down promoters’ shares to the prescribed level is the acquisition increases promoters’ stake above the maximum limit of 15 percent. It will also get time to bring down the credit-to-deposit ratio below 80 percent and regularise deprived sector lending.

The acquiring institution will be given priority for upgradation provided conditions are fulfilled.  The central bank will help if problems related to salaries of employees and chief executive officers of the acquiring entity or any other problems due to acquisition arise. It will also make recommendations to the government for additional facilities.

Source: The Kathmandu Post