CB to allow above-normal investments in banks

The Central Bank (CB) will in future sanction large investments by single entities as it did in the case of TPG, the USA-based global private investment firm that is taking a 70 per cent stake in Union Bank (UB), a top CB official said.

“Anyone going beyond 10 per cent (investing above 10 per cent stake in a bank) has to obtain Monetary Board (MB) approval and in this case we welcomed TPG’s investment through its affiliate Culture Financial Holdings Ltd in UB as it will make this bank stronger,” Nivard Cabraal, Governor CB told the Business Times. UB announced on Thursday that it has finalised an investment agreement with the US-based global investment giant TPG in which the latter is investing US$.117 million in the local bank.

Currently a single investor or group cannot hold more than 10 per cent in a bank and needs to have the CB approval for a higher stake, which is generally up to 15 per cent.

Meanwhile the CB is yet to respond to the request made by John Keells to retain its 30 per cent in Nations Trust Bank PLC (NTB), according to sources. When asked about this Mr. Cabraal said that these are case by case approvals. “Based on that particular case we will grant approval,” he said.

CB brought in minimum ownership of banks to promote better corporate governance and to reduce the concentration of ownership and to address conflicts of interest that may arise due to large shareholdings. Current rules say that a single entities’ material share ownership is generally limited to 15 per cent of a bank’s share capital with CB approval.

“In this case (UBC – TPG) there’s no concentration risk,” Mr. Cabraal said, adding that it’s one thing to have a large investment in one bank and ‘quite another’ to have large investments in several banks. Harry Jayawardena and Dhammika Perera, both businessmen are those who have surpassed the single shareholder limits in banks.

An industry analyst said that mandatory ownership limits will matter less, if mandatory governance rules ensure autonomy of boards and management, while defining their responsibilities and guaranteeing accountability. “Relaxing ownership limits either in theory or in practice, without enforceable governance, is a high risk strategy,” he added.