PCA Framework: Navigating New Bank Merger Guidelines 4 Key Steps
Navigating the New Bank Merger Guidelines in Bangladesh: A Strategic Move Under the PCA Framework
The current bank merger is one of the protective measures as well as a discretionary measure for the non-performing banks under the purview of the prompt corrective action framework or PCA framework introduced by the Bangladesh Bank via BRPD Circular No – 17 dated 05.12.2023. Accordingly, on 04.04.2024, the Bangladesh Bank issued the first ever bank merger policy i.e. Guidelines for Merger/Amalgamation of Banks/Financial Institutions (the “Guideline”), outlining both voluntary or agreed mergers and forced mergers.
I. PCA Framework:
The PCA framework implemented by Bangladesh Bank is a crucial regulatory measure aimed at strengthening the stability and resilience of the banking sector in the country. The PCA framework will be implemented on March 31, 2025, is designed to proactively deal with possible financial problems in banks by introducing corrective actions determined by certain financial indicators. (The Daily Star) (The Financial Express).
As per the PCA Framework, the Banks are classified into 04 (four) tiers within this structure depending on metrics like Capital to Risk weighted Assets (‘CRAR’), Tier 1 capital ratio, Common Equity Tier 1 (CET1) ratio, Net Non-Performing Loan (NPL), and corporate governance standards. Depending on the type, banks are required to implement different corrective steps, which can range from preserving capital to implementing stricter measures for categories with higher risks.
The primary focus of the PCA framework is on detecting and intervening early to address risks such as the increase in NPLs before they worsen. This proactive method is similar to routine financial evaluations, enabling banks to address problems quickly and uphold stability.
II. Guidelines for Merger/Amalgamation of Banks/Financial Institutions:
Banking Companies and Financial Institutions are registered under the Companies Act, 1994 (CA-94) and are subject to its provisions, except where covered by the Banking Companies Act, 1991 (BCA-91) or the Financial Institutions Act, 1993 (FIA-93). These entities can amalgamate with similar institutions (i.e., banks with banks, financial institutions with financial institutions) per Sections 228/229 of the CA-94.
Banks and financial institutions operate with public deposits; thus, the Bangladesh Bank is empowered to prevent any activity that could harm depositors’ interests or financial discipline. Statutory provisions require the Bangladesh Bank to evaluate the impact of mergers or amalgamations on depositors, the institutions involved, and the financial system. Section 49 (1) (c): Bangladesh Bank must assist in amalgamation proposals of banking companies. Section 76: High Court Division cannot approve compromises or arrangements between a banking company and its members without Bangladesh Bank’s certification. Section 28: Amalgamation of financial institutions requires prior approval from the Bangladesh Bank. Bangladesh Bank can request necessary information to evaluate the amalgamation proposal.
Mergers or amalgamations involving banking companies or financial institutions cannot proceed without the Bangladesh Bank’s assurance that the transaction will not harm depositors, the companies involved, or the country’s financial system.
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III. Scope of the Guideline:
The guidelines cover efforts towards mergers/amalgamations by banking companies/financial institutions in the private sector, including foreign banks operating in Bangladesh, and Nationalized Commercial Banks with necessary modifications under the Bangladesh Banks (Nationalization) Order, 1972.
They apply to:
- Mergers/amalgamations of a banking company with another banking company.
- Mergers/amalgamations of a financial institution with another financial institution.
- Mergers/amalgamations where a banking company is the transferee of a financial institution.
- Negotiated takeovers of banks by financial institutions where the bank operates as a subsidiary or qualifies to hold a banking license post-merger.
- Reconstructions involving compromises or arrangements with other banks or financial institutions, including the acquisition of branches, swapping of branches, and transfer of certain businesses.
IV. Brief on the step-by-step procedures as per the Guidelines:
1. Proposal of Merger/Amalgamation:
- Banks or financial institutions must pass a resolution by their Board of Directors to proceed with a merger/amalgamation.
- This resolution is considered price-sensitive information under the Securities and Exchange Commission Act, 1993 read with the Securities and Exchange Commission (Subidhabhogi Byabsaye Nishiddhakaran) Rules, 1995.
2. Commencement of Due-Diligence:
- The transferee company must seek prior approval from Bangladesh Bank to begin financial and legal due-diligence.
- They must submit (a) its credentials (business background, resources, including net worth etc.) and (b) details regarding the team of Lawyers, Financial Advisors, Chartered Accountants, Valuers etc. for conducting due-diligence of the asset and liability position of both the companies.
- Team members should not have conflicts of interest.
3. Confidentiality:
- The transferee company and the due-diligence team must undertake to keep all information confidential unless legally required to disclose it.
- Submit an undertaking as per Annexure A of the Guideline.
- Breach of this confidentiality will lead to withdrawal of approval by Bangladesh Bank.
- Due-diligence team shall not demand from the transferee/transferor companies, any information or observations made by Bangladesh Bank in relation to the affairs and the business of concerned companies or the Bangladesh Bank inspection report, either in part or full.
4. Submission of Due-Diligence Report:
- The due-diligence team must submit a report to Bangladesh Bank detailing secured and unsecured debts, asset values (as per Annexure B of the Guideline), liabilities, and the financial impact of the merger.
5. Consent of Shareholders/Creditors::
- Based on due-diligence findings, a scheme of merger/amalgamation is prepared and approved by the Board of Directors.
- The scheme must be approved by a majority representing three-fourths in value of the members or creditors present.
6. Submission of Scheme to Bangladesh Bank:
- The transferee company submits the approved scheme and supporting documents to Bangladesh Bank together with such other documents as are mentioned in Annexure C of the Guideline if applicable.
7. Examination of Draft Scheme:
- Bangladesh Bank assesses the feasibility and impact of the scheme based on various factors as enumerated in Annexure D of the Guideline.
8. Valuation of Assets and Liabilities:
- Valuation is mutually agreed upon by the transferor and transferee companies.
- Bangladesh Bank may mediate if disputes arise and will decide on valuations if mediation fails.
9. Transaction Price:
- The price is agreed upon by the parties, with Bangladesh Bank ensuring it is fair and reasonable.
- An explanatory note on pricing rationale may be required by Bangladesh Bank.
10. Approval by Bangladesh Bank:
- The transferee company and the due-diligence team must undertake to keep all information confidential unless legally required to disclose it.
- Submit an undertaking as per Annexure A of the Guideline.
- Breach of this confidentiality will lead to withdrawal of approval by Bangladesh Bank.
- Due-diligence team shall not demand from the transferee/transferor companies, any information or observations made by Bangladesh Bank in relation to the affairs and the business of concerned companies or the Bangladesh Bank inspection report, either in part or full.
11. Petition to High Court:
- Following Bangladesh Bank’s approval, companies file an application with the High Court under the Companies Act.
- The High Court may sanction the scheme, stipulating provisions for asset transfer, share reconstruction, legal proceedings, and dissolution of the transferor company.
- The scheme becomes binding once approved by the Court and filed with the Registrar of Joint Stock Companies.
- If necessary, the transferee bank/financial institution may seek a change of name and approval from Bangladesh Bank.
Note:
“The Bangladesh Bank may impose any other obligation or step in its discretion in addition to the stipulated steps and formalities mentioned in the Guideline.”
References:
- Bangladesh Bank BRPD Circular No. 17, dated 05.12.2023.
- Bangladesh Bank Guidelines for Merger/Amalgamation of Banks/Financial Institutions, issued on 04.04.2024.
- The Companies Act, 1994.
- The Bank Companies Act, 1991.
- https://www.thedailystar.net/business/column/news/prompt-corrective-action-framework-bold-move-3498376
- https://thefinancialexpress.com.bd/views/bangladesh-banks-pca-framework-commercial-banks-preparedness
- https://www.thedailystar.net/business/banking/news/framework-early-rescue-formed-banks-3486811
- https://www.thedailystar.net/business/news/banks-can-voluntarily-merge-until-december-bangladesh-bank-3565231?amp