The
Chief Executives,
All Banks/DFIs
Dear Sirs/Madam,
ESTABLISHMENT OF SUBSIDIARIES
BY BANKS/DFIs
In order to maintain appropriate regulatory
oversight of and to facilitate the Banks/DFIs in establishing
subsidiaries for the purpose of diversification of their
activities, the following instructions are being issued:
i)
The Banks/DFIs desiring to establish any subsidiary shall
obtain prior approval of State Bank of Pakistan. The application
for the approval should contain the following information:
a) The functions and activities to be undertaken by the
proposed subsidiary.
b) The investment to be made by the bank/DFI in the paid-up
capital of the subsidiary.
c) The structure of the management and the Board of Directors
of the subsidiary and the extent of bank’s / DFI’s
involvement in the management and Board of Directors.
d) Any feasibility report, if prepared by the bank/DFI.
e) The interrelationship of the bank/DFI and the subsidiary
covering the functions which will be performed by the bank/DFI
for the subsidiary and vice versa.
ii)
The subsidiary shall be a public limited company.
iii)
The Board of Directors of the subsidiary should be completely
independent and different from the Board of Directors of
the Bank/DFI. The Bank/DFI may nominate its employees on
the Board of Directors of the subsidiary up to 25% of the
total directors, and the remaining directors nominated by
the Bank/DFI should be independent individuals.
iv)
The Bank/DFI will fulfill all the other legal and regulatory
requirements needed for the establishment of proposed subsidiary.
In case of banks, it should be ensured that the subsidiaries
are established only for activities as are admissible under
Section 23 of the Banking Companies Ordinance, 1962.
v)
Before increasing its investment in the equity of the subsidiary,
the Bank/DFI will seek prior approval of State Bank of Pakistan.
vi)
It is clarified that the per party exposure limit proposed
by regulation R-1 of Prudential Regulations for Corporate/Commercial
Banking will be applicable on exposure to the subsidiary
and any type of placement in the form of deposit, purchase
of COI, certificates, units, etc. shall be considered part
of the exposure of the Bank/DFI. Further, the exposure of
the Bank/DFI on mutual funds launched/administered by the
subsidiary shall also be considered exposure on the subsidiary.
vii)
The Banks/DFIs shall take sufficient measures to ensure
that the Bank/DFI is not exposed to risks, especially reputation
and legal risks, on account of its subsidiary. For this
purpose, it should be ensured that:
a) The transactions with the subsidiary should be conducted
at arms length basis and appropriate fees should be charged
for the services rendered by the Bank/DFI in this respect.
b) The Bank/DFI should avoid involvement in the day-to-day
operations of the subsidiary.
c) Steps should be taken to make the customers/clients of
the subsidiary aware that the subsidiary is an independent
organization and it should not be construed as a part of
the bank/DFI.
d) The Chief Executive, CFO and other employees of the subsidiary
company shall not be in the employment of the Bank/DFI.
2.
The Non-Bank Finance Companies set-up as subsidiaries will
be regulated by the SECP.
3.
The above instructions will supercede the instructions issued
vide BPD Circular No. 34 dated 22nd October 2003.
4.
Please acknowledge receipt.