Ramifications of People’s Bank Act amendment

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People’s Bank

“All paid up shares of the bank shall be held by the Secretary to the Treasury in his official capacity, for and on behalf of the CROWN” – Now repealed!

After much debate and expressions of social concerns the controversial Bill to amend certain sections in the People’s Bank Act was passed in Parliament on 19 September with 72 Parliamentarians from the Government outvoting 37 members from the Opposition. The full cadre of JVP MPs in Parliament voted with the Opposition against the Bill. 

Some MPs in the Joint Opposition attempted to bring in some qualifying amendments in order to avoid any possible consequential complications. But it was heart-breaking to note the absence of several MPs from the Opposition to participate in the debate in spite of the disputed nature of the Bill strongly hypothesised as a concealed stratagem paving the way to dilute Government ownership of the bank. 

The amendment is now passed and it is law. Nevertheless, the various criticisms that were raised about the Bill before it became law remind us about the proverbial expression “the law is an ass”. The good intentions as well as any adverse ramifications will remain to be futuristic but not unrealistic.

A landmark achievement 

People’s Bank was established in 1961 as a landmark achievement of the SLFP Government headed by Prime Minister Sirimavo Bandaranaike. The Bill was presented to Parliament by the then Trade Minister T.B. Illangaratne, when Felix Dias Bandaranaike was the incumbent Minister of Finance. The concept, plan and the design for the creation of the bank was mooted by Philip Gunewardhane when he was the Minister of Cooperatives and Agriculture in a previous government. 

The original Act of Incorporation of the bank [Act No.29 of 1961] became law from 1 July 1961. This Act was first amended in 1986 by Ronnie De Mel as the Minister of Finance in the Government of the late President J.R. Jayewardene. It was titled People’s Bank Amendment Act No. 36 of 1986. The purpose of this amendment was mainly to widen the scope of the objectives and powers of the bank and to add additional recovery procedures to the enactment. 

It is to be recalled with gratitude that an eminent and highly-respected Minister of Finance turned former civil servant Ronnie De Mel saw to it that the ownership of the People’s Bank by the State was neither compromised nor left at stake due to the amendments proposed despite the fact that he was in a Government with an absolute majority in the Parliament to do anything!

Let us examine in detail the consequential developments arising out of the latest Amendment to this Act that was passed in Parliament on 19 September. It is common knowledge that there were serious speculations and assumptions of a suspicious nature which were exacerbated due to some castigating remarks made by those replying the issues at the time of the debate and irrelevant and deceptive explanations offered by the government spokesman when tabling the Bill last month. 

Share capital

The first amendment sought was to replace section 12 of the Act in force (Act No. 29 of 1961), aiming to increase the authorised capital of the bank. According to the existing section 12(1), there is provision to increase the share capital, viz. “the share capital may, however, be increased from time to time by such amount as may be determined by resolution of the House of Representatives”.

Accordingly there is provision to increase the share capital of the bank without any amendment. It can be done by a resolution adopted by the Parliament unless some blockhead thinks that the House of Representatives and the Parliament are two separate institutions. Even under the Amended Act the Finance Minister has to place his Order to increase the authorised capital before Parliament for approval.

But there are other hidden emanations due to the repealing of certain Sections in the current Act resulting from the Amendment which need to be addressed separately. Amendment has repealed sections 12[2], [3] and [4] of the principal Act, which read as follows;

Repealed Section 12[2], “all paid up shares of the bank shall be held by the Secretary to the Treasury in his official capacity, for and on behalf of the CROWN”.

When this section is repealed there is nothing in the Act elsewhere that states or rather limit the holding of shares ONLY by the Secretary to the Treasury.

During the debate as well as during the recent COPE inquiry against the PB, authorities cited section 13(1) in the Act as a suitable safeguard for this. This is a complete misrepresentation of facts because, Section 13(1) deals only with the sale of shares and not about the limitation of the right to hold shares.

Quote Section 13 (1): “No shareholder of the bank shall sell his shares to any person other than a cooperative society or the Secretary to the Treasury in his official capacity.”

Due to the repealing of section 12(2) as quoted above Secretary to the Treasury is no longer the sole shareholder of the Bank. Therefore in the event of creating a shareholder under some manoeuvre such shareholder can continue to hold the shares unless and until he decides to sell such shares to the ST. This is one area missed by several who conjectured about other ramifications. 

If the process of issuing debentures ends up in the denouement of converting them to shares instead of repayment at maturity, then there is nothing in the Act now to prevent any such person becoming a shareholder of the bank to the extent of the value of the unpaid debentures held by him. The explanation given by the Government that no one other than the ST can hold shares of the bank is therefore untenable.

It is rather unfortunate and unsavoury to have misquoted a completely irrelevant Section (13 {1}) to show that shares cannot be held by anyone other than the ST when that section deals with a completely different aspect.

Sections 12[3] and [4], which also get repealed under this Amendment, deal with the manner in which the shares owned by the Cooperative Federal Bank to be taken over by the Secretary to the Treasury. As it applies to one specific instance, this provision does not make any difference whether the sections are continued as it is or repealed.

From this it becomes very clear that a serious uncertainty and doubt is created with regard to the sole requirement of holding the shares by the Secretary to the Treasury. This dubiety is worse confounded since there is no provision in the Act anywhere else stating that the shares should only be held by the Secretary to the Treasury.

Issue of debentures

Now let us take a look at the effect of the next amendment, the replacement of section 20 of the principal enactment.

The existing section 20[1], which is repealed now, clearly provided for the bank to raise money by the issue of debentures for granting medium-term and long-term loans. According to the provisions of this section the Bank could EITHER raise debentures with the approval of the Minister of Finance given after consultation with the Monetary Board of the Central Bank of Ceylon, OR with the approval of the Minister given with the concurrence of the Minister of Finance request the Monetary Board of the Central Bank of Ceylon to raise on its behalf, any sums by the issue of debentures.

Accordingly the Bank could on its own issue debentures OR get the Monetary Board to issue debentures on its behalf subject to the approval of the Minister.

Section 20[3] made it compulsory for the MB of the CBSL to comply with a request made in accordance with the provisions of the Act, if the issue of the debentures necessary for compliance with that request is approved by the Minister of Finance.

But now these sections are repealed.

The amendment to repeal the section 20 of the Act provide for;

I. The bank to raise any sum as debentures with the approval of only the Minister;

II. Removal of the requirement for the Minister to consult with the Monetary Board of the CBSL before granting his approval to raise debentures;

It was pointed out by the critics that an amendment to provide for the MB and the CBSL intervention before issuing debentures would be a necessary safeguard against the granting this right to a politically-appointed board of the bank appointed by the minister himself who is a political animal without any reference to the highest body in the country the MB, empowered by the Monetary Law Act to administer and regulate the monetary system of the country. 

They viewed this as a faulty and imperfect step, particularly in the context of what is revealed as operational bungles committed by the Board with huge costs to State funds. In their view the elimination of the need to consult the MB and the CBSL before the bank raise further funds by way of loans committing the Crown as the sole shareholder is a matter that should receive the attention of all in the national interest. 

Government guarantee

The next item in the proposed amendment is the amendment of section 21 of the principal act by repealing the para [b] of sub section [1]. This section reads as follows;

“The Minister of Finance shall guarantee-the repayment of any sum due on debentures issued under this Act.”

The effect of this removal is to withdraw the Government guarantee. This amendment also seeks to repeal subsection [3] which provided for the repayment to the treasury by the bank of any sum paid out by the Treasury in fulfilment of guarantee provided in respect of debentures issued by the bank.

This provision indicates that the Government guarantee that was offered on account of debentures issued by the bank is not a grant to the bank but subject to the condition of repayment to the Treasury by the bank in a manner to be determined by the Minister of Finance. In other words the obligation on the part of the bank to meet any liability arising on account of issue of debentures despite the guarantee of the government was clearly laid down. 

Power of the minister

The next amendment that is proposed is to repeal para [c] of subsection [2] of Section 43 of the principal enactment. It deals with the power of the minister to make regulations inter-alia in respect of the issue of debentures; viz. “The form of debentures, the rate of interest payable thereon, the time or times at which and the manner in which debentures are to be redeemed, the transfer of debentures and any other matter connected with, or incidental to, the aforesaid matters relating to debentures.”

The effect of this section was for the Government to have a perfect control of the instruments created by the board of directors of the bank to raise money on its behalf because as the sole shareholder of the bank it is the Treasury and the Government that would be finally responsible for the obligation on account of any liability so created.

We can see to what extent our pioneer legislators have been careful to curtail the unlimited operational freedom of the board. Seeing what is happening today, as revealed at the Parliamentary COPE committee there is no doubt that the foresight of our legislators was absolutely imperative in introducing indispensable safeguards. 

The IMF and WB are constantly pressurising the divesting of ownership of the bank by the Government. No amount of operational freedom granted has been able to put the bank on the right track. No authorities or regulators have been successful in bringing to book those who have violated procedures. This unsatisfactory state of affairs is continuing unabated. The big question that arises in such a context is whether it is prudent to grant a carte-blanche to such a poorly managed place to raise funds based on their surmise and guesstimate. The obvious safe option would have been to allow the intervention of the MB to continue to checkmate any possible overruns.

Regulation and control of matters relating to banking 

From what has transpired a serious doubt arises as to whether the legislators paid heed to another very important aspect relating to the Amendment that was passed.

The Banking Act No. 30 of 1988 was enacted inter-alia to provide for regulation and control of matters relating to the business of banking. Section 6 of this Act reads as follows;

No licensed commercial bank shall-

I. Carry on any banking business other than the business specified in the license;

(a) Carry on any other business other than those specified in Schedule II to this Act;

But under Section 7 of this Act, Bank of Ceylon, People’s Bank and the Regional Rural Development Bank are exempted from these restrictions. The reason being, those banks, unlike the other Licensed Commercial Banks, are established under separate Acts of Incorporation with specific powers conferred on each such bank by and under the aforesaid statutes applicable to each such bank respectively. 

The need for the MB and the CBSL to intervene in certain specific activities of the People’s Bank were incorporated in the Statute. When those provisions are repealed consequent to the Amendment of the Act, there is no provision for the regulatory authorities to apply the controls to People’s Bank that they are normally authorised to apply in the case of other Licensed Commercial banks in the country. 

Was this aspect anticipated by the legislators when they repealed certain important sections of the People’s Bank Act in this Amendment exercise?

Eran’s opinion

State Minister of Finance Eran Wickramaratne emphasised that they are proposing to increase the authorised capital of the bank to Rs. 50 billion by this Amendment in order to increase the financial stability of the People’s Bank. Increasing the authorised capital will not increase the capital base of the bank unless shares are issued to that value. The most relevant question is, from where is the Government expecting the capital to come?

He goes on further to state that by enabling the bank to issue debentures without any government guarantee, the bank can raise capital. His view is that the Amendment Bill will provide some autonomy and independent decision making ability to People’s Bank. We are compelled to invite the attention of the State Minister to the following historical facts lest he is unaware of those:

I. On 15 April 1993, the Government of Sri Lanka and People’s Bank entered into an agreement countersigned by then Chairman of the Committee on Financial Reform, Baku Mahadeva, with R. Paskaralingam as the Secretary to the Treasury, stipulating conditions and directives to be observed by People’s Bank to regularise its business operations, following a recapitalisation by the Treasury.

II. Since 1993 from time to time the Government has infused capital to the tune of over Rs. 50 billion to help the bank to meet the required capital adequacy requirements.

III. The Cabinet in 1993, by a special directive issued, granted complete operational autonomy to the People’s Bank and exempted the bank from the applicability of Government Circulars. 

Mr. State Minister, let me conclude this short write up by stating that the “autonomy and the independence for decision making” that you are talking today may not be the panacea for the ever-ailing People’s Bank to stand on its feet by itself. The continued pumping in of capital and provision of avenues to raise more and more funds in the manner it is now designed may instead cause serious incurable and irremediable damages to this nationally important public institution, in the establishment of which your political party played no role.

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