The Banking Companies Ordinance, 1962

Definitions:

Section 5 clause (c) deals with the definition of the ‘Banking Company’. It is proposed to make the definition more exhaustive by including the branches and subsidiaries functioning outside Pakistan of banking companies incorporated in Pakistan in the definition.

Similarly, Section 5 clause (e) defines the word “Company” under the Ordinance.  This definition is also proposed to be amended so as to include a branch of a foreign banking company doing banking business in Pakistan under a licence issued by the State Bank of Pakistan in this behalf, as company.

It is proposed to add the definition of “foreign banking company” under new clause (ffa) meaning as “a banking company, not incorporated in Pakistan, which has a branch or branches doing banking business in Pakistan under a licence issued by State Bank in this behalf;”.

Business of Banking Companies:

Section 7 of the Banking Companies Ordinance, 1962 is an empowering section which elaborates the types of businesses a banking company can engage in. Under the present clause (o) of sub-section (1) the Federal Government was empowered to add any other form of business which the banking company can under take. Now by virtue of the proposed amendment these powers are being vested with the State Bank, who can notify any other form of business through circular.
  
Regulation Of Paid-Up Capital Subscribed Capital And Authorized Capital And Voting Rights Of Share-Holders:

Section 14 of the Ordinance deals with the conditions precedent to be complied with in connection with the capital structure of the banking company. In the existing clause (ii) sub-section (1) only ordinary shares of the banking company were to constitute the capital of the banking company. Now it is proposed to also allow perpetual non-cumulative preference shares to form as capital of the banking company.
 
Restrictions as to Payment of Dividend:

Section 19 describes the conditions which banking companies must fulfill before it could pay dividends. Now in this section a new sub section is being introduced whereby if a banking company meets the following conditions, it shall also be eligible for payment of dividend out of profits of the banking company for the said year:

1. If it meets the minimum capital requirement and capital adequacy ratio as specified by State Bank from time to time, and
2. It has also accounted for the portion of capitalized expenses, goodwill etc., for the year to the satisfaction of the auditor of the banking company.

Audit:

Section 35 of the Ordinance deals with the provisions relating to the audit of the banking companies. By virtue of the proposed amendments it further disciplines the procedure for appointment/removal of the auditors and increases the responsibility of the auditor for effective conduct of the audit.

It is proposed that the State Bank shall classify the panel of auditors, in different categories for different banking companies keeping in view the scope and size of such banking companies.
 
Furthermore, two sub sections are being introduced whereby if the State Bank is not satisfied with the performance of the auditor of a banking company or the auditor has not fulfilled any of the requirements laid down in this section the State Bank after giving the auditor an opportunity of being heard may,-

1. revoke the appointment of external auditors of the banking company;
2. downgrade the category of the auditor in the panel of the Auditors; and
3. remove the auditor from the panel of the auditors for a maximum period of five years.

An additional responsibility is being imposed on the auditors to report all the matters of material significance to State Bank and such reporting shall not constitute breach of confidentiality under any law for the time being in force.

Power of the State Bank to Give Directions:

Section 41 of the Ordinance deals with the special powers of the State bank to give directions for the smooth running of the banking company in the best interest of the public. It is proposed to insert new sub section empowering the State Bank to issue, from time to time, direction, guidelines and instructions with respect to activities and operations of banks and the institutions mentioned in section 3A as may be deemed necessary by it .

Procedure for Amalgamation of Banking Companies:

Section 48 of the Ordinance lays down the procedure for the amalgamation of the banking companies. It is proposed that a proviso should be added relaxing the requirement for calling a meeting of the shareholders of a foreign banking company for approving the scheme of merger. Hence forth a certificate issued by the head office of the foreign banking company approving the scheme for merger will satisfy the requirement of the State Bank. Further more sub-section (7) is being amended to include “branch of a foreign banking company doing business in Pakistan” in the definition of banking company for the purpose of this section..

Terms and Conditions of the Banking Mohtasib:

Section 82B terms and conditions of the appointment of Banking Mohtasib including powers vested in his authority.  By virtue of the proposed amendment it is proposed to give him the following powers/responsibilities: 

1. receiving evidence on affidavit;
2. issuing commission for the examination of witnesses

However, the Banking Mohtasib shall not entertain any complaint or application which has already been disposed off by the State Bank, or any court in Pakistan before the commencement of the Banking Companies (Amendment) Act, 2007.

Procedure for Making Complaints:

Section 82D describes the procedure for making complaints to the Banking Mohtasib. Under the existing provisions for making complaint the complainant has to wait for three months to receive the response form the bank against whom a complain is being lodged and thereafter in case of no/unsatisfactory response, three more months are allowed to the complainant to file the complaint. Now it is proposed to enhance these periods from three months to forty five days.

Recommendations for Implementation:

Section 82E deals with the recommendation of the Banking Mohtasib for implementation in the event the Mohtasib comes to the conclusion that the complainant was justified.  It is proposed to amend sub section 4 enabling any bank, or official of a bank, or a complainant aggrieved by any order passed by the Banking Mohtasib to prefer an appeal to the Governor State Bank within thirty days of the order and the Governor shall decide the appeal within sixty days.

It is to be further provided that the findings of Banking Mohtasib should be implemented by the concerned bank or financial institution within a period of forty days and compliance thereof shall be submitted accordingly. In case an appeal against the decision of the Banking Mohtasib is filed before the State Bank the aforesaid period of forty days shall be reckoned from the date of decision of appeal.

Penalties:

Section 83 deals with provisions describing penalties. It is proposed to amend the amount of penalties under the various provisions. The details are as under:

It is further proposed to add a proviso which empowers the State Bank to debit the amount of default to any account of the banking company held with the State Bank, without notice to the banking company, if a banking company fails or refuses to pay the fines.

Exchange of Information:

Section 93C of the Ordinance provides for the exchange of the information among banking companies on confidential basis either directly or indirectly through Pakistan Banking Council. It is proposed to delete the words Pakistan Banking Council (being redundant). Now such information can be exchanged with “credit information services provider”.

Disclosure of information:

Section 93E of the Ordinance is a new insertion which provides for various measures for curtailment of money laundering and funding of terrorism or terrorists activities.

 This section requires the banking companies and financial institutions to disclose information on confidential basis to the State Bank, about their respective clients as required by State Bank, in such manner and within such time as may be prescribed from time to time.

It further requires that In case any grounds for suspicion exist in respect of a business transaction the banking company or the financial institution concerned shall forthwith report to the State Bank, giving details in respect of the identity of the person involved the transaction or any other circumstances concerning such business transaction.

Explanation: The expression “suspicion” refers to a suspicious business transaction as the State Bank may, by regulations, determine

If the State Bank has reasonable grounds to suspect that a person or a company or corporation is involved in an offence of money laundering or funding of terrorism or terrorists, it may send such information to the law enforcement agency having jurisdiction in the matter.

It shall not be unlawful for any person or the State Bank or a banking company or any employee thereof to make any disclosure in good faith in compliance with the provisions of this section.

No action, suit or proceedings shall lie against any bank or financial institution including State Bank and their employees for any injury or loss caused to any person due to the disclosure made under this section. Further no person shall be entitled to claim any compensation or damages or institute any suit or proceedings for any injury or loss caused to him by disclosure of such information. No bank or financial institution shall take any action of whatever nature against any employee of bank or financial institution for disclosing any information.

Provided that where State Bank, after examination, concludes that a transaction reported to State Bank under subsection (2) was conveyed with malafide intent, it shall take action against the concerned bank and the concerned employees for misreporting under subsection (1) of section 83.

Pending investigation in the case, the State Bank may pass an order for freezing the accounts of such person or company or corporation. Provided that the investigation shall be completed by State Bank within one hundred and eighty days.

Any person aggrieved by such order may make a representation to the State Bank against such order. The State Bank shall decide such representation within thirty days and any person aggrieved by the decision may prefer an appeal to the High Court. If incriminating evidence is not found during the investigation, the State Bank shall withdraw such order.

The court or the authority, to which the case is referred after completion of the investigation, may confirm, modify, rescind or alter the order passed by the State Bank under sub-section (6) or it may pass any other order as deem fit by law:

Explanation:- “Money Laundering” includes engaging in any manner, whether directly or indirectly, in a transaction that involves property which is proceed of a crime, or transferring proceeds of crime through legitimate means in order to conceal or make untraceable their original source, or doing of such other act that may constitute the offence of money laundering under any other law; and “terrorism” or “terrorist” shall have the same meaning as assigned to them by the Anti-Terrorism Act, 1997 (XXVII of 1997).

Disclosure of information liable to punishment:

Section 93F of the Ordinance requires that any person having knowledge of or suspicion of an investigation into offence of money laundering or funding of terrorism or terrorists, not to disclose that fact or other information to another person whereby the investigation is likely to be effected in any manner. Such person,  upon compliant by an officer of the State Bank specially authorized in this behalf, shall on conviction by Court of Sessions be punishable with imprisonment of either description which may extend to five years or with fine which may extend to one hundred thousand rupees or with both.

The offence described above shall be non-bailable and non-compoundable.

General Amendment:

It is further proposed to substitute the words, comma, figures, brackets and letters “Companies Act, 1913 (VII of 1913)” wherever occurring with the words, comma, figures, brackets and letters “Companies Ordinance, 1984.