The Bangladesh Bank (BB) decided for the corrective measures for the financial sector in line with the recommendations made by the International Monetary Fund (IMF) under its $4.7 billion loan programme. BB issued the Prompt Corrective Action (PCA) framework in December 2023 to identify weak performing banks and to give a procedural direction for mergers and acquisitions amidst the deteriorating financial condition (business failure)of some banks and financial institutions.
A definition of business failure is - a business that closes or ceases operations, causing the creditors to lose money. Moreover, a failing firm is a firm that has been consistently earning negative profits and losing market share to such an extent that it is likely to go out of business. Business failure happens due to ceasing operations following its inability to make a profit or to bring in enough revenue to cover its expenses. Even a profitable business can fail if it does not generate adequate cash flow to meet expenses. There are countless reasons a business can fail, but most business crises are caused by the mistakes of upper management.
A firm is failing, if it is failing and unable to meet the financial obligation, reorganization of the alleged failing firm is not a realistic option; and the firm is unable to take an option (similar to chapter 11 of the Bankruptcy Act of USA) to take further loan, operate the business with certain authority of decision making to the creditors and pay to creditors after a certain period.
The merger of acquisition proposes three criteria for judging a rescue mergers: (i) one of the firms involved in the merger must be failing; (ii) there is no alternative buyer who could provide for a less anti-competitive solution; (iii) The ailing has made unsuccessful good-faith efforts to elicit reasonable alternative offers of acquisition of the assets of the failing firm that would both keep its tangible and intangible assets in the relevant market and pose a less severe danger to competition than does the proposed merger. (iv) absent the acquisition, the assets of the failing firm would exit the relevant market.
The assets of the failing firm would otherwise exit the market and its market shares would be acquired by the acquiring firm. Otherwise, substantial lessening of competition (SLC) or significant impediment to effective competition (SIEC) would also be the outcome without the merger.
In the case of a private company, the takeover policy is very new: (i) The companys articles of association allow a takeover process.(ii) The companys board of directors approve the takeover process, (iii) Approval of the shareholders are required for private placement of shares.
In case of acquisition, the buyer will enjoy relaxed rules for a specific period when it comes to keeping the cash reserve ratio, the statutory liquidity ratio, the liquidity coverage ratio, and the net stable funding ratio. The acquirer will enjoy facilities from the banking regulator to issue shares, perpetual bonds and subordinated bonds to expand the capital base. The PCA will come into effect from March 2025.
The countrys banking sector experienced a steep rise in default loans by Tk25,000 crore in 2023. At the end of December last year, the total default loan in the banking sector stood at Tk1.45 lakh crore, accounting for 9% of the total loans that stood at Tk16.17 lakh crore. Bangladesh Bank data shows that the capital shortfall for 14 banks reached Tk37,506 crore at the end of September last year.
The central bank recently plans to go for forced merger of at least 10 distressed or weak bank by January next year as part of its road map to reduce default loans and ensure corporate governance in the banking sector.
According to the media report, the central bank assured directors of proposed merger will not be affected by mergers as their financial losses will be compensated. If a weak bank merges with a strong one, the government will compensate the strong bank after evaluating the weak banks losses through an audit firm.
The PCA guideline gives an indication that the non-performing loans (NPLs) of weak banks may be bought by an asset management company to be financed by the government. In another media report said that acquiring companies will establish separate units or take measures to realise loans of acquired entities. In the case of a forced merger, the BB can appoint an administrator by dissolving the board of the weak banks or financial institutions. Later, the regulator will seek bids from interested buyers. The guideline said managing directors, additional managing directors, and deputy managing directors of the weak banks can be appointed if the board of the acquiring banks agrees but no employees of the merged entity could be fired within three years of a takeover by the acquirer.
Besides weak banks, even strong banks can be merged to form a large private commercial bank to reduce the number of banks, the governor suggested to bank directors in the meeting.
The weak bank won retain ownership. The losses they incur from taking on assets will be subtracted from their paid-up capital. If anything remains afterward, only then will the directors of weak banks hold shares equivalent to that amount.
Competition law in many countries prohibits mergers and acquisitions where the effect of such acquisition "may be substantially to lessen competition, or to tend to create a monopoly." A merger or acquisition that may otherwise substantially lessen competition or tend to create a monopoly may still be permitted if the target firm qualifies as "failing." Section 15 of the Competition Act, 2012 restricts any takeover which may impact directly or indirectly the competition or creates a monopoly or oligopoly in the market. The Act of 2012 empowers the Bangladesh Competition Commission (BCC) to investigate complaints raised under the Act. However, the Competition Commission has not yet been fully operational. The BCC, created in 2016 according to The Competition Act 2012 and earmarked as the authority for merger control, has yet to formulate its guidelines and as such has no role to play in transactions of merger & Acquisition (M&A).
The writer is a Non-Government Adviser, Bangladesh Competition Commission
