Judgment of High Court in KASB Bank merger with Bank Islami - Khalid Zafar & Associates

KASB Merger Case

KASB Bank Limited (“Bank”) was a Pakistani bank and was subjected to action by the Federal Government and the State Bank of Pakistan under Section 47 of the Banking Companies Ordinance 1962 (the “Ordinance) firstly by way of a moratorium and then by amalgamation with Bank Islami Pakistan Limited. The value of KASB Bank at the time of amalgamation was held to have a negative valuation and as a result the shareholder were not given any compensation for the shares. The basic allegation against the Bank was that its capital adequacy ratio (CAR) was not up to the required limit and that the minimum capital requirements were not being met.

The merger/amalgamation was challenged inter alia on the grounds that actions taken against the Bank were contrary to Article 24 of the Constitution of Pakistan. Furthermore, the m andatory procedure laid down in the subsections 6 & 7 of section 47 of the Ordinance had not been properly followed and the discretion vest in terms thereof in the Federal Government and State Bank had been exercised in a mala fide manner. The most important above all was that an ample opportunity was not given to shareholders to lodge their objections and suggestions.

The crux of the verdict given by the learned High Court while deciding the above petition is as follows:

Observations of the Court

1. There was a complete failure to comply with the requirement of subsection 6 and 7 of section 47 of the Ordinance as State Bank of Pakistan gave only two days to respond and that only to the Bank. As far members were concerned they were given one day only. The time period given for filing the reply cannot be regarded as reasonable.

2. The Directors undoubtedly represented the Bank, which itself was entitled to the file suggestions and objections. The directors could perhaps also be regarded as representing those who held the bulk of the shareholding as it was they who would have elected them to the Board. However the directors absolutely did not and could not represent other shareholders and the depositors and creditors. No direct communication appears ever to have been addressed to the members, depositors and other creditors of the banking companies.

3. Subsections 6 and 7 of section 47 of the Ordinance are intended to apply on their own footing and independently of what follows in terms of subsection 8 of Section 47. It is for the State Bank to apply itself to the suggestions and objections received and modify the proposed scheme in suitable circumstances or even drop it altogether. That legal responsibility cannot be shifted onto the Federal Government nor discharged by it.

4. Shareholders and depositors and creditors are not the constituencies of the Bank and they could not be deprived of their rights under the subsections. The legislative intent behind the subsections must be kept in mind. The law intends for the banking companies, their members, depositors and creditors to be in a position to make or take meaningful and substantive suggestions or objections.

5. Banking Companies and their members, depositors and creditors were entitled to the valuation report of the external auditors.

6. Under subsection 7 of section 47 of Ordinance, the SBP must be regarded as being under a duty not only to send the proposed scheme to the banking companies but also to ensure that they take all reasonable steps to forward the same to their members, depositors and other creditors. The banking companies and their members etc. should be provided with at least some (though not necessarily all) of the information on the basis of which the State Bank has proposed the scheme.

7. The State Bank shall not be under obligation to post or give any information record in relation to the valuation other than the auditors’ report and shall be entitled to reject or ignore any request that may be made for any additional information record.

• High Court directed SBP on the following grounds:

• The State Bank shall, within 30 days of this judgment, give notice to those persons who were members/shareholders of the Bank on 27.04.2015 inviting objections to the negative valuation of the Bank as set out in the scheme of amalgamation. The notice shall be prominently displaced on the website of the State Bank and also published in the press. The notice shall also be sent by the State Bank to the Stock Exchange, CDC and Bank Islami and they shall be obligated to simultaneously publish it on their websites. The State Bank shall make all reasonable efforts to locate the particulars of the persons aforesaid from the Stock Exchange, CDC and Bank Islami and also issue notice to them individually to the extent possible. However, publication in the press and on the website of the State Bank shall be sufficient. The period within which the objections can be taken shall be set out in the notice and shall be 15 days from its publication on the website of the State Bank.
• Simultaneously with the publication of the notice as above, the State Bank shall also prominently post in full (i.e. inclusive of any annexures etc.) the auditors’ report regarding the valuation of the Bank on its website. The notice shall also contain a statement therein that the report is so available on the website.
• The State Bank shall not be under obligation to post or give any information/record in relation to the valuation other than the auditors’ report and shall be entitled to reject or ignore any request that may be made for any additional information/record.
• The State Bank shall consider all objections that may be received along with any material record supporting the same. Such objections may be made by any members/shareholders.
• The State Bank shall issue a reasoned and speaking order (“order”) within 30 days of the last day for filling of objections. The order shall be published by posting on the SBP website and intimation of such posting shall also be given in the press.
• The order shall either confirm the valuation of the Bank earlier arrived at and used for the purposes of the scheme of amalgamation or it may make some other valuation.