SHC orders SBP to reconsider valuation of KASB Bank

Court did not declare valuation incorrect, instead wants SBP to revisit whole process

Shahbaz Rana April 20, 2018
Court did not declare valuation incorrect, instead wants SBP to revisit whole process PHOTO: PPI

ISLAMABAD: Almost three years after the questionable merger, Sindh High Court (SHC) ordered the State Bank of Pakistan (SBP) to reconsider valuation of the defunct KASB Bank and ruled that the central bank did not adequately fulfill its statutory duty to protect the interests of all stakeholders.

In May 2015, the SBP amalgamated KASB Bank with BankIslami Pakistan Limited by invoking section 47 of the Banking Companies Ordinance of 1962 at a token price of Rs1,000.

The SHC becomes the third state institution that has found serious flaws in one of the most controversial merger deals in the country’s banking history. Earlier, the National Accountability Bureau and Auditor General of Pakistan (AGP) raised objections, pointing at the billions of rupees in losses to the exchequer and shareholders of the defunct KASB Bank.

The court has now directed the central bank to reconsider the defunct bank’s valuation of Rs1,000. But the court did not declare the valuation “incorrect” and instead asked the SBP to revisit the whole process set out for determination of the valuation.

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The court has also directed the SBP to share the external auditors’ report on KASB Bank’s valuation, which the central bank has kept confidential from shareholders.

The SHC said that external auditors could have wrongly assessed the value and this could only be verified if the whole exercise is performed as per statutory requirements, which the central bank earlier completely ignored. The court directed that within one month the SBP will issue notices to KASB Bank’s shareholders, inviting their objections to the negative valuation of the bank at the time of amalgamation.

The SBP will then consider all objections that it may receive and issue a Speaking Order within one month of the last day of receiving objections, directed the Sindh court.

The order will either confirm the earlier value of the bank or determine a fresh valuation. In case, the fresh valuation is higher than the earlier valuation, the SBP will pay the compensation to shareholders, according to the judgment.

The decision strengthens the stance of KASB Bank’s sponsors, who believe that despite the shortage of capital their assets were worth Rs6.6 billion. The provincial court has found serious flaws in execution of the amalgamation scheme by the central bank.

“There has been a clear breach of the statutory duty” by the SBP, ruled the SHC. The central bank also gave a “woefully inadequate” time to respond to the amalgamation scheme, it stated.

The SBP did not give appropriate time to shareholders of the KASB Bank to review and object to the amalgamation scheme.

“Subsections 6 and 7 of section 47 of the Banking Companies Ordinance impose mandatory statutory duties on the State Bank and these cannot be sidestepped, avoided or abandoned,” according to the judgment. The court further observed that these two important sub sections are not merely steps along the way to an inevitable enforcement of the proposed scheme, but are essential to a consideration and assessment of the very viability of the entire project.

The sub section 6 binds that the SBP must send the draft of the proposed amalgamation scheme to all the concerned stakeholders that in this case include KASB Bank. The sub section 7 authorises the central bank to accommodate recommendations by stakeholders.

“In our view, the State Bank must be regarded as being under a duty, not only to send the proposed scheme to banking companies but also to ensure that they take all reasonable steps to forward the same to their members, in such manner which enables them to take objections in a meaningful manner within the stipulated time,” the SHC opined.

Petitioners had argued that the mandatory procedure laid down in section 47n had not been properly followed and applied and the federal government, along with the SBP, had exercised powers in a mala-fide manner.

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The judgment establishes that the SBP did not protect the rights of shareholders of the defunct KASB Bank. The petitioners also informed the SHC that BankIslami was also in breach of the Capital Adequacy Ratio requirement, for which action was taken against the KASB Bank.

The Chinese company that came forward with investment proposal was not allowed to proceed further for mala fide reasons, according to the petitioner counsel’s views.

The irregular amalgamation caused roughly Rs3.5 billion in losses to the exchequer in addition to Rs6.6 billion as losses to sponsors of the defunct bank, also affirmed a new report of the AGP.

Published in The Express Tribune, April 20th, 2018.

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Saud Usmani | 6 years ago | Reply "The judgment establishes that the SBP did not protect the rights of shareholders of the defunct KASB Bank"......... What is more important rights of depositors or shareholders? SBP did the right thing they protected the hard earned money of depositor's of defunct KASB ... Bankislami paid 27 Billions to the depositor's of defunct KASB in few weeks time, which restored confidence of general public in private banking system. The rest are procedural flaws which can be sorted out.... but the transaction was very simple... e.g. KASB has assets of 10 billions and Liabilities of 25 billions! any child can calculate value of assets minus fifteen(-15).
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