BAFIA Amendment Bill

Chairman, CEO not to get more than two four-year terms

Published On: November 22, 2016 09:15 AM NPT By: Sagar Ghimire  | @sagarghi

KATHMANDU, Nov 22: The Finance Committee of the parliament has approved a bill to amend the Bank and Financial Institution Act (BAFIA), reducing tenure of board directors and chief executive officers (CEOs) of bank and financial institutions (BFIs) to four years.

According to the new bill, CEO, chairperson and managing director can get appointment at a bank or financial institution for a maximum of two terms. It, however, has not set such term limit for board directors.

After the law comes into effect, the CEO will not be able to remain for more than two terms, or a total of eight years, in the same BFI. However, the chairperson or managing director will face continuous two-term limit, implying that s/he may get back into the same position taking a break after two terms. The bill will be tabled in the full house of the parliament for endorsement very soon, according to Prakash Jwala, chairperson of the committee. 

The parliamentary panel has reviewed most of the provisions, including term limits for the CEO and chairperson, in line with the instruction from the full house when the bill was returned on June 21. The parliament had sent the draft of BAFIA amendment bill back to the Finance Committee in the wake of widespread criticisms on some of the controversial provisions passed on the behest of some legislators who are either chairperson or board director of BFIs. 

The committee adopted middle way approach while finalizing controversial provisions in the earlier bill.  "We approved the bill by finding a middle-path solution in most of the provisions following consultations with all stakeholders like bankers, the central bank, private sector representatives, and the Ministry of Finance, among others," Deepak Prasad Kuikel, a member of the Finance Committee, who was also the coordinator of a sub-committee which finalized the earlier draft, said.

While those legislators with direct corporate interests have sidestepped from the active role in finalizing the draft bill this time, they were exerting influence in the amendment from behind the scene, according to a legislator who preferred anonymity.

The amendment bill approved by the Finance Committee also bars a member of constitutional body from becoming a board director of BFIs. 

This new measure was introduced by Nepal Rastra Bank (NRB), the central bank, to block any undue influence by powerful people, in its regulation, monitoring and supervision of the BFIs. NRB officials have been complaining that it was becoming difficult for them to regulate the BFIs where a legislator sits in the board. 

The new provision in the amendment bill restricts a person, who has faced action from the regulatory body for professional misconduct, to become board director up to five years. The earlier draft had a provision to bar only those who have faced action for criminal deeds. 

The newly approved bill has retained a provision which allows BFIs to allocate 0.5 percent of their shares to their staff.  Likewise, the microfinance institutions will not be allowed to identify themselves as a 'bank'.

Lock-up period of 10 years proposed

conversion of promoters shares to public
Bank and financial institutions (BFIs) will be allowed to convert their promoter shares into public after a lock-up period of 10 years if a bill to amend the Bank and Financial Institution Act (BAFIA) approved by the parliamentary Finance Committee on Monday is endorsed by the full house without any changes. 

The earlier bill had a provision of seven-year lock-up period.

This means that the promoter shareholders of BFIs will be allowed to sell their shares after 10 years of the BFI coming into operation. Currently, a bank must have 51 percent promoter shareholders, while public can have up to 49 percent of ownership. 

At present, promoter shareholders have to undergo a lengthy process, including the permission of the central bank, to sell his/her ownership. The issue of conversion had stirred debate in the committee meeting and among stakeholders. 

The Nepal Rastra Bank (NRB) was not interested on allowing such conversion when the then finance minister Ram Sharan Mahat inserted the provision before tabling it to the parliament. His successor Bishnu Prasad Paudel openly accused Mahat in the committee meeting that the provision was introduced with the aim of increasing share price of BFIs. 

Price of promoter shares is far lower compared to public shares. 

However, Mahat had defended his move, saying that the proposed lock-up period was aimed at providing easy exit to investors. "One cannot lock his investment for an indefinite period. An entrepreneur will always seek to transfer his resources from one sector/business to another, as he will not confine his capacity to a single sector," he had told Republica. 

Amid intense debate, the finance committee has found a middle-path solution, giving wide latitude to the NRB to decide whether to allow conversion even after 10 years of lock-up period by taking into consideration the impact of such conversion in the capital market, banking and financial sector.


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