Do persons who endorsed specific clarification on investment in shares of TFC by NSB conform to ‘fit

In the case of locally incorporated banks, the promoters are expected to provide information on the financial standing, experience and suitability of the members of the first Board of Directors. In addition, the proposed Board of Directors should comply with the ‘fit and proper’ criteria for the appointment of Directors as indicated under Section 42 of the Banking Act No. 30 of 1988 as amended by the Banking Act No. 2 of 2005.1

Banking (Amendment) Act (No. 2 of 2005)2, Section 16 covers the replacement of section 42 of the principal enactment and now inter alia reads as;

(1) No person shall be appointed, elected or nominated as a director of a licensed commercial bank or continue as a director of such bank unless that person is a fit and proper person to hold office as a director of such bank and if he is not prevented from doing so by any provision of this Act or of any other written law.

(2) In determining whether a person would, for the purposes of subsection (1) be considered to be a fit and proper person, the following matters shall be taken into consideration:

(a) that such person possesses academic or professional qualifications or effective experience in banking, finance, business or administration or of any other relevant discipline;



(b) that there is no finding of any regulatory or supervisory authority, professional association, any Commission of Inquiry, tribunal or other body established by law in Sri Lanka or abroad, to the effect that such person has committed or has been connected with the commission of, any act which involves fraud, deceit, dishonesty or any other improper conduct;



(c) that such person is not subject to an investigation or inquiry consequent upon being served with notice of a charge involving fraud, deceit, dishonesty or other similar criminal activity, by any regulatory authority, supervisory authority, professional association, Commission of Inquiry, tribunal or other body established by law, in Sri Lanka or abroad ;



(d) that such person has not been convicted by any Court in Sri Lanka or abroad in respect of a crime committed in connection with financial management or of any offence involving moral turpitude;



(e) that such person is not an un-discharged insolvent nor has he been declared a bankrupt in Sri Lanka or abroad;



(f) that such person has not failed, to satisfy any judgement or order of any court whether in Sri Lanka or abroad, or to repay a debt;



(g) that such person has not been declared by a court of competent jurisdiction in Sri Lanka or abroad, to be of unsound mind;



(h) that such person has not been removed or suspended by an order of a regulatory or supervisory authority from serving as a director, Chief Executive Officer or other officer in any bank or financial institution or corporate body, in Sri Lanka or abroad;



(i) that such person has not been a director, Chief Executive Officer or held any other position of authority in any bank or financial institution.

(4) Every licensed commercial bank shall notify the Director of Bank Supervision in such form as may be determined by the Director, the name, address and occupation of:



(a) each person proposed to be appointed, elected or nominated as a director of the bank, before such appointment, election or nomination as the case may be;



(b) each person appointed, elected or nominated as a director of the bank, within fifteen days after such appointment, election or nomination as the case may be;



(c) any director of the bank, if the bank is aware that such person is not a fit and proper person, or where such director becomes otherwise ineligible to hold office as such director, within fifteen days of its becoming aware of such facts.



(5) The Director of Bank Supervision may, having regard to the matters specified in subsections (1), (2) and (3), approve or refuse to approve the proposed appointment, election or nomination as the case may be as a director of the licensed commercial bank of the person referred to in paragraph



(a) of subsection (4) and shall, within 30 days after submission of the name of such person under that subsection, notify the bank of such approval or refusal, giving reasons therefor. It shall be the duty of the bank to communicate such notification to the person to whom it relates.

(7) A licensed commercial bank shall not appoint, elect or nominate as a director of the bank, a person whose appointment, election or nomination as the case may be has not been approved under subsection (5) or subsection (6):

(8) Where the Director of Bank Supervision, having regard to the matters specified in subsections (1), (2) and (3) is satisfied at any time that a person appointed, elected or nominated as the case may be as a director of a licensed commercial bank is not a fit and proper person or that he is otherwise ineligible for appointment, election or nomination as the case may be or that the election, appointment or nomination as the case may be of a person as a director of a licensed commercial bank contravenes the provisions of subsection (3) or subsection (7) the Director shall submit a report to the Monetary Board. The Board may, if it is satisfied on consideration of the report and such other matters which in its opinion merit inquiry, that the person is not a fit and proper person or the election, appointment or nomination as the case may be of the person contravenes the provisions of subsection (3) or subsection (7):



(a) direct the bank in writing to remove such person from the office of director within such period as may be specified in such direction, giving the reasons for such direction; and



(b) notify in writing the person whose removal is required under such direction, of such direction, a copy of which shall be annexed to such notification,

(9) A licensed commercial bank which fails to comply with any direction given under paragraph (a) of subsection (8) within the period specified in such direction and a director who has been served with a notice under paragraph (b) of section (8) who continues to function as a director, shall each be guilty of an offence and shall be liable on conviction after trial before a Magistrate to a fine of rupees five hundred thousand and shall:



(a) be liable in the case of the bank, to a further fine of rupees one hundred thousand, in respect of each day the bank fails to comply with such direction after such conviction; and



(b) be liable in the case of a director of the bank, to a further fine of rupees one hundred thousand in respect of each day such director continues as director after such conviction.

(11) Where any written law, other than this Act, provides for the appointment of a person as a director of a licensed commercial bank by virtue of an office the person holds, the preceding provisions of this section shall not apply to the appointment of that person as a director of such bank.

(12) The responsibilities of the Board of Directors shall include the overseeing of the management of the affairs of the Bank.

‘Guidelines on Fit and Proper Criteria’

‘Guidelines on Fit and Proper Criteria’ issued by the Monetary Authority of Singapore3 reads:

Fit and Proper Test

(6) MAS will broadly take the following criteria into account in considering whether a relevant person is fit and proper:



(a) honesty, integrity and reputation;



(b) competence and capability;



(c) financial soundness.



(o) in addition to sub-paragraphs (a) to (n), where the relevant person is an individual:

Some of the relevant subsidiary sections that define persons who are not ‘fit and proper’ read as:



(i) is or has been a director, partner, substantial shareholder or concerned in the management of a business that has been censured, disciplined, prosecuted or convicted of a criminal offence, or been the subject of any disciplinary or criminal investigation or proceeding, in Singapore or elsewhere, in relation to any matter that took place while the person was a director, partner, substantial shareholder or concerned in the management of the business;



(ii) is or has been a director, partner, substantial shareholder or concerned in the management of a business that has been suspended or refused membership or registration by MAS, any other regulatory authority, an operator of a market or clearing facility, any professional body or government agency, whether in Singapore or elsewhere;



(iii) has been a director, partner, substantial shareholder or concerned in the management of a business that has gone into insolvency, liquidation or administration during the period when, or within a period of one year after, the relevant person was a director, partner, substantial shareholder or concerned in the management of the business, whether in Singapore or elsewhere;

(iv) has been dismissed or asked to resign from:

(A) office;

(B) employment;

(C) a position of trust; or;

(D) a fiduciary appointment or similar position,

whether in Singapore or elsewhere;

(v) is or has been subject to disciplinary proceedings by his current or former employer(s), whether in Singapore or elsewhere;

(vi) has been disqualified from acting as a director or disqualified from acting in any managerial capacity, whether in Singapore or elsewhere; and

(vii) has been an officer found liable for an offence committed by a body corporate as a result of the offence having proved to have been committed with the consent or connivance of, or neglect attributable to, the officer, whether in Singapore or elsewhere.

Competence and capability

12 The factors set out in the following paragraphs are relevant to the assessment by MAS of the competence and capability of a relevant person. MAS will consider

2, amongst others:

(a) whether the relevant person has satisfactory past performance or expertise, having regard to the nature of the relevant person’s business or duties, as the case may be, whether in Singapore or elsewhere;



(b) where the relevant person is an individual who is assuming concurrent responsibilities, whether such responsibilities would give rise to a conflict of interest or otherwise impair his ability to discharge his duties in relation to any activity regulated by MAS under the relevant legislation;

 (d) in relation to a relevant person whose activity is regulated by MAS under the FAA or the SFA, whether the representative of the relevant person has:

(i) satisfactory educational qualification or experience, whether in Singapore or elsewhere, having regard to the nature of the duties they are required to perform; and



The aforesaid local statutory and regulatory guidelines read together with the bench mark guidelines from the Monetary Authority of Singapore, should enable the Office of the President to assess whether any person who endorsed or was associated with the specific clarification on the investment in the shares of The Finance Company PLC (TFC) by NSB conform to the ‘Fit & Proper’ guidelines expected of them in their official positions, especially in regard to the following extracts of a statement issued by the Directors of NSB as appearing in the paid newspaper advertisement;



1. The offer from TFC initially came to NSB (who brought the offer and in what capacity and was it solicited or unsolicited and most importantly was he /it a ‘fit and proper person’?) to subscribe for their voting shares in January 2011.



2. The Bank carried out a detailed analysis on TFC (did this analysis reveal that TFC had financial viability, long term and immediate term sustainability and solvency, going concern status, ability to meet all present and contingent liabilities, with acceptable related party transactions and appear as an institution where risks were effectively managed subject to appropriate due diligence tests on account of its past purported financial mismanagement and most importantly an institution where the promoters, directors, and officers qualified under a ‘fit and proper’ test?) and was willing to purchase the voting shares (was this purchase deemed not ultra vires the powers of investment vested in the NSB ?) up to aproximately8.33% .



3. Similarly, the Bank received an invitation from a stock broker to purchase voting shares in March 2012. (Was this offer solicited or unsolicited? Were there any other interested parties and promoters of this transaction? Had the NSB an ongoing acceptable operating relationship with the broker? Did the Board validate the ‘fit and proper ‘status of the broker and whether it had any related party or other conflicts of interests?)



4. Since the Bank had already carried out a detailed analysis in January 2011, the Board Sub Committee on Corporate Lending and Equity Investment (trust all members are persons with proven acceptance as conforming to applicable ‘fit and proper’ guidelines?) decided (are there properly delegated authority and financial limits set defining the operating frame work of the sub-committee?) to re-look at the investment from a strategic initiative (do the members of the Sub Committee qualify as ‘fit and proper’ persons with ‘competences and capability’ requirements to carry out a strategic investment evaluation with necessary financial and other evaluations, compliance testing, risk analysis and stress testing, etc.?) point of view with further analysis.



5. Having done a further analysis (did this further analysis reconfirm that that TFC had financial viability, long term and immediate term sustainability and solvency, going concern status, ability to meet all present and contingent liabilities, with acceptable related party transactions and appear as an institution where risks were effectively managed subject to appropriate due diligence tests on account of its past purported financial mismanagement and most importantly an institution where the promoters, directors, and officers qualified under a fit and proper test?), a favourable consideration was given (were there formal Investment Committee minutes supporting such favourable consideration and did the subcommittee have power on its own to sanction or were there other limits of approval requiring further board approval and were these processes followed?) to purchase voting shares of TFC, amounting to 10-15% (was it validated before purchase whether the transaction was not ultra-vires the Bank’s legal, regulatory and powers? (Was a formal buy order executed authorising the broker to transact and did such order meet all internal procedures, processes, limits of authority, internal control and compliance requirements? If there was no formal authorised ‘buy’ order who empowered the Broker to transact a ‘buy’ or did the broker act on his own accord?)



6. However, since the Board was of the view that benefits (i.e. not the validity of this investment and it not being ultra-vires the powers of the Bank and its Board?) of this investment is not as strong enough to proceed with (was this view of the Board before or after the ‘buy ’order was executed?), a decision was taken not to make the payment, due on this transaction.(If a formal buy order had been executed by the NSB or an authorised officer of the NSB, a valid contract has been executed and non payment will be a violation of the contract. The NSB, its directors and officers will carry liability and also invoke reputation risks and hence not an option ‘fit and proper’ directors can exercise!)



7. As a socially conscious and responsible State-owned financial institution, we wish to give a strong pledge to the general public that we would continue to uphold all traditions of our Bank (more important than traditions, the pledge required of directors is that they operate the business of the within the laws of the land as applicable and in full compliance with all regulations and operating instructions, adhering to best practices of good governance as ‘fit and proper directors’) and as done in the past continue our quest in having the depositors and other stakeholders total interests in our minds in the future as well as the leader in developing you and the country (and not forgetting the commitment to transparency, good governance, effective management of possible conflicts of interests and related party transactions at all times committing to being ‘fit and proper’ with (a) honesty, integrity and reputation; (b) competence and capability; and (c) financial soundness.)



1 http://www.cbsl.gov.lk/pics_n_docs/09_lr/_docs/licensing/bsd_licensing.pdf

2 http://www.commonlii.org/lk/legis/num_act/ba2o2005198/

3 http://www.mas.gov.sg/resource/legislation_guidelines/securities_futures/sub_legislation/Guidelines%20on%20Fit%20and%20Proper%20Criteria_FSG-01_Sept_07.pdf



(The writer is a former Chairman of the Ceylon Chamber of Commerce.)