About laws maintaining categorisation of insurance, bank directors
Friday, 29 January 2010
observer
THE Bangladesh Insurance Association has convinced the Parliamentary Committee on the Ministry of Finance to adopt new election system for the Board of Directors of insurance companies. The Act initially proposed that there should be equal number of seats for directors elected from the general investors group to that elected from the sponsor group and an individual cannot be a director of a bank and an insurance company at the same time.
The concerned parliamentary committee on the ministry of finance has recommended to double the number of seats for sponsor shareholders than general investors and maintain the existence of common directorship for individuals in the boards of banks and insurance companies. This change favoured the vested interests of certain groups of people and as such, it be discarded on grounds of serious conflict of interest.
Laws maintaining categorisation of shares by any company or any sector should never be framed as that will always help the sponsor group of investors and badly affect the level playing field for general shareholders. For example, the banking sector earlier used to maintain categorisation of shares and elect directors mainly from the sponsor group but. It has changed via a directive by the Securities & Exchange Commission (SEC) to all banks to remove categorisation after serious protests from the Bangladesh Bank.
This became possible as the Banking Act was silent on this issue. Every individual has the fundamental right to own a property and if he/she so owns this property, he/she should have the right to manage this property. A company as a whole is a property with units of it divided into shares. This effectively means that the owners of the units or shares are the owners of the company itself and they should have the right to manage/govern the affairs of the company. It is the owners who will always look into the best interests of the company because by doing so their best interests will be served.
Classification of shares in essence distinguishes the sponsors or promoters from the public shareholders comprising of small shareholders, large shareholders, financial institutions, brokers/dealers, portfolio managers, mutual funds, etc.
The situation in Bangladesh is, in the case of life insurance companies, the sponsors had initially put in Tk 30 million (3.0 crore) in order for the company to commence operations. After that, they went for a Tk 45 million (4.5 crore) initial public offering or IPO -- a larger amount than what the company had initially started with. Additionally, in the CDBL system, there is no way to tell apart a sponsor share from a public share once dematerialised and there is no way of recording sponsors' shares in the CDBL system. CDBL acknowledges that the percentage of sponsor shares will be gradually diminishing if dematerialised shares, shares transferred to nominees in the event of death, bonus shares, right shares and gifted shares are all considered to be public shares. The sponsors are manipulating this situation to their advantage by maintaining classification of shares because it makes it possible to establish a quota system by which they are guaranteed seats in the Board of Directors of the company, although in terms of total shareholding, they are usually in the minority.
Therefore, classification or, in turn, a special quota for sponsors in the Board of Directors prohibits the real owners or majority owners from managing or governing the affairs of the company and, thus, the best interests of the company and its shareholders cannot be protected or guaranteed as the people running the affairs of the company may not be elected from the majority of its owners or shareholders. The quota system is thus highly undemocratic. Only in a democratic system can the interests of all types of shareholders be protected without special treatment to any, because their vote will count to elect the directors of a company and in return, their voices will be heard.
Under the Disclosure and Investor Protection Guideline in India drawn by the Securities and Exchange Board of India, "The relationship between a promoter and a company which he has floated must be deemed to be a fiduciary relationship from the day the work of floating the company started. The status of the promoter is generally terminated when the Board of Directors has been formed and they start governing the company." Therefore, a promoter/sponsor does not enjoy any special benefits and the same system should be put in place in Bangladesh.
The members of parliament (MPs) do need to appreciate the situation, in a proper perspective, before they enact and implement a law which is highly undemocratic and which goes against the spirit of good corporate governance. In our view, investors have suffered enough due to bad policy decision-making by the Securities and Exchange Commission (SEC) and the Finance Ministry in the past, and this issue should not be allowed to add to the pain of the general investors.
The writer who prefers anonymity can be reached at e-mail:
therovingeye@hotmail.com
THE Bangladesh Insurance Association has convinced the Parliamentary Committee on the Ministry of Finance to adopt new election system for the Board of Directors of insurance companies. The Act initially proposed that there should be equal number of seats for directors elected from the general investors group to that elected from the sponsor group and an individual cannot be a director of a bank and an insurance company at the same time.
The concerned parliamentary committee on the ministry of finance has recommended to double the number of seats for sponsor shareholders than general investors and maintain the existence of common directorship for individuals in the boards of banks and insurance companies. This change favoured the vested interests of certain groups of people and as such, it be discarded on grounds of serious conflict of interest.
Laws maintaining categorisation of shares by any company or any sector should never be framed as that will always help the sponsor group of investors and badly affect the level playing field for general shareholders. For example, the banking sector earlier used to maintain categorisation of shares and elect directors mainly from the sponsor group but. It has changed via a directive by the Securities & Exchange Commission (SEC) to all banks to remove categorisation after serious protests from the Bangladesh Bank.
This became possible as the Banking Act was silent on this issue. Every individual has the fundamental right to own a property and if he/she so owns this property, he/she should have the right to manage this property. A company as a whole is a property with units of it divided into shares. This effectively means that the owners of the units or shares are the owners of the company itself and they should have the right to manage/govern the affairs of the company. It is the owners who will always look into the best interests of the company because by doing so their best interests will be served.
Classification of shares in essence distinguishes the sponsors or promoters from the public shareholders comprising of small shareholders, large shareholders, financial institutions, brokers/dealers, portfolio managers, mutual funds, etc.
The situation in Bangladesh is, in the case of life insurance companies, the sponsors had initially put in Tk 30 million (3.0 crore) in order for the company to commence operations. After that, they went for a Tk 45 million (4.5 crore) initial public offering or IPO -- a larger amount than what the company had initially started with. Additionally, in the CDBL system, there is no way to tell apart a sponsor share from a public share once dematerialised and there is no way of recording sponsors' shares in the CDBL system. CDBL acknowledges that the percentage of sponsor shares will be gradually diminishing if dematerialised shares, shares transferred to nominees in the event of death, bonus shares, right shares and gifted shares are all considered to be public shares. The sponsors are manipulating this situation to their advantage by maintaining classification of shares because it makes it possible to establish a quota system by which they are guaranteed seats in the Board of Directors of the company, although in terms of total shareholding, they are usually in the minority.
Therefore, classification or, in turn, a special quota for sponsors in the Board of Directors prohibits the real owners or majority owners from managing or governing the affairs of the company and, thus, the best interests of the company and its shareholders cannot be protected or guaranteed as the people running the affairs of the company may not be elected from the majority of its owners or shareholders. The quota system is thus highly undemocratic. Only in a democratic system can the interests of all types of shareholders be protected without special treatment to any, because their vote will count to elect the directors of a company and in return, their voices will be heard.
Under the Disclosure and Investor Protection Guideline in India drawn by the Securities and Exchange Board of India, "The relationship between a promoter and a company which he has floated must be deemed to be a fiduciary relationship from the day the work of floating the company started. The status of the promoter is generally terminated when the Board of Directors has been formed and they start governing the company." Therefore, a promoter/sponsor does not enjoy any special benefits and the same system should be put in place in Bangladesh.
The members of parliament (MPs) do need to appreciate the situation, in a proper perspective, before they enact and implement a law which is highly undemocratic and which goes against the spirit of good corporate governance. In our view, investors have suffered enough due to bad policy decision-making by the Securities and Exchange Commission (SEC) and the Finance Ministry in the past, and this issue should not be allowed to add to the pain of the general investors.
The writer who prefers anonymity can be reached at e-mail:
therovingeye@hotmail.com