Legal formalities of defunct KASB Bank remain unfulfilled

Bank was handed over to BankIslami in May 2015 in return for Rs1,000 by SBP

ISLAMABAD: Over four years after the alleged 'non-transparent' merger of defunct KASB Bank, the federal government could not submit an amalgamation report before the Parliament due to an ongoing court case and a pending investigation by the anti-corruption watchdog.

The Banking Companies Ordinance of 1962 - which the central bank invoked to handover the KASB Bank to BankIslami in May 2015 in return for Rs1,000 - also binds the government to submit the amalgamation report before the Parliament. But this legal formality has not been fulfilled during the past four years and four months, according to sources in the Ministry of Finance.

The key hurdles remained a civil suit filed by the previous shareholders against the central bank and the federal government to get fair value of their assets and a four-year old investigation by National Accountability Bureau (NAB) against the State Bank of Pakistan (SBP), AF Ferguson and BankIslami officials, they added.

The NAB was taking longer than the required time to conclude the findings due to constant pressure by the SBP to exonerate its officials from the allegations of misuse of authority and favouritism, said the sources.

In order to fulfil the remaining legal formalities of the merger of the defunct KASB Bank, Adviser to Prime Minister on Finance Dr Abdul Hafeez Shaikh took a meeting on Thursday. Shaikh decided to seek legal opinion of the Ministry of Law and Justice on whether the report can be submitted before Parliament without conclusion of the court case and the NAB investigation, sources said.

"Copies of the (amalgamation) scheme or of any order made under sub-section (11) shall be laid on the table of the Legislature, as soon as may be, after the scheme has been sanctioned by the federal government, or as the case may be, the order has been made," states sub-section 12 of the Section 47 of the Banking Companies Ordinance.

On May 7, 2015, the SBP allowed merger of KASB Bank into BankIslami, after the former could not meet the statutory paid-up capital requirement of Rs10 billion. However, the SBP had given Rs5 billion at 0.01% to BankIslami for 10 years and Rs15 billion short-term financing. This would cause a loss of Rs3.45 billion on account of this extraordinary favour to BankIslami, according to the Auditor General of Pakistan's report.

The Rs1,000 valuation wiped out 1.95 billion shares, held by 9,000 shareholders and major shareholders have filed a civil suit, claiming compensation from the SBP and the federal government.

The NAB was also looking into the aspect of why reconstruction of the bank under Section 47 (d)(i) was not considered and changing the management and the board for safeguarding interest of the shareholder before its amalgamation.

The central bank had hired the AF Ferguson for evaluation of the defunct KASB Bank. In its November last year response to NAB, the chartered accountancy firm argued that "AFF's scope of work related to due diligence and valuation of KASB on a standalone basis and the work was not undertaken for amalgamation."

The sponsors of the defunct bank have claimed before the courts that while valuating the worth of the defunct bank, AF Ferguson did not take into account all aspects such as market based value of KASB Bank shares, recoveries of fully provided Non-Performing Loans against securities of Rs10 billion and tax losses of Rs10.8 billion available to the acquiring bank.

The market value of 61 million shares of Shakarganj Food Ltd, based on sector multiples, about Rs6.5 billion; estimated appreciation of Rs1 billion in real estate owned by the bank and offers received for HUB property were not considered by the AF Ferguson, according to them.

These aspects are also under investigation of NAB. The AF Ferguson submitted a detailed reply in November last year to clear its position.

It was the responsibility of the SBP to select and decide on the value of the KASB for the purpose of finalising the scheme of amalgamation after considering various inputs, AFF valuation of KASB, SBP's discussions with other banks involved in due diligence process and the SBP's own assessment of the KASB Bank, according to the chartered accountancy firm's response seen by The Express Tribune.

The chartered accountancy firm said that it "conducted a balanced assessment" of the defunct KASB bank.

The NAB had ordered the inquiry in September 2015 on the basis of a story published in The Express Tribune. However, it was taking significant time in deciding whether a reference should be filed. The sources said that NAB Karachi office has recommended the Headquarter to file a reference against all the accused persons.

The NAB investigation has accused seven top officials of the SBP and two persons attached with AF Ferguson of concluding a "non-transparent amalgamation of KASB bank into BankIslami and grant of Rs20 billion concessional loan by SBP to BankIslami.

NAB version

The NAB's spokesman claimed that there was no pressure from any side. Nawazish Ali said that NAB was an independent organisation and our performance was ample evidence as all our decisions were made in accordance with the law.

He claimed that there was no delay at all as cases are examined in operation and prosecution divisions and after that presented in pre-executive Board Meeting. But he did not respond to the query why the reference has not been filed despite recommendation by the NAB Karachi office.