…over irregular shares changes
By Ernest Chanda
THE Bank of Zambia (BoZ) has threatened to sanction First Alliance Bank for breaching sections 25 and 27 of the banking and financial services Act.
Section 25 of the Act holds that: “(1) Subject to subsection (2), a person shall not without
prior approval of the Bank, in writing –
(a) acquire any beneficial interest in the voting shares of a financial service provider; or
(b) enter into any voting arrangement or other agreement that would enable that person or another person to control more than twenty-five per cent of the total votes that could be cast at a meeting of the financial service provider. (2) Subject to section 27 (3), where a person intends to – (a) acquire beneficial interest in the voting shares of a financial service provider; or (b) enter into a voting arrangement trust or other agreement; that would enable that person to control more than twenty-five percent of the total votes that may be cast on a resolution at a meeting of the financial service provider, the financial service provider shall obtain the prior written approval of the Bank…”
And section 27 provides that: “(1) A beneficial owner shall not own shares in the capital of, or acquire or maintain control in, more than one financial service provider, without the prior written approval of the Bank. (2) A nominee may hold shares in a financial service provider only if the beneficial owner is identifiable and complies with this Act. (3) A beneficial owner shall not transfer to another person any shares or other form of ownership in a financial service provider that constitutes a significant shareholding, without the prior
written approval of the Bank…”
In 2017, First Alliance Bank Limited changed its shareholding structure without informing the Central Bank as required in the banking and financial services Act.
In a letter dated June 21, 2022 addressed to FAB managing director Kuldip Paliwal, BoZ deputy governor in-charge of operations and registrar of financial service providers Dr Francis Chipimo threatened to impose a monetary penalty of about K5.2 million.
“…As you may be aware the Bank of Zambia (BoZ) has been reviewing a matter in which First Alliance Bank Zambia Limited (FAB) allegedly changed the shareholding structure of the bank in 2017 without prior approval from the BoZ as required under sections 25 and 27 of the Banking and Financial Services Act (BFSA),” he wrote. “The review also included establishing the role played by senior management, directors, and shareholders of FAB in this matter based on the legal and regulatory requirements pertaining to banks. The BoZ has established that FAB, did indeed, effect unauthorised transfers of 20,99,958 fully paid-up ordinary shares from Mr. Suresh Kumar Gupta to Mrs. Daxa Sanmukh Patel; 42 fully paid-up ordinary shares to Nitesh Gandubhai, and a further 840,000 fully paid-up ordinary shares from Mr. Asanuma Ramanlal Patel to Mr. Sanmukh Ramanlal Patel.”
Dr Chipimo outlined other findings the Central Bank made in its review of First Alliance Bank’s performance.
“In addition, we also noted that the Board of Directors authorised the said transfers via a signed resolution passed on October 11, 2017, despite the absence of approval from the BoZ to transfer the shares. You may wish to note that the board members have ultimate responsibility for managing the affairs of the bank. However, regarding this matter, the board members failed or neglected to exercise due care to ensure that FAB remained complaint with the provisions of the Banking and Financial Services Act before and after effecting the changes to the shareholding structure at the Patents and Companies Registration Agency,” he wrote. “Further, the BoZ has established that there was no guidance provided by the Company Secretary regarding the procedures on change of the shareholding structure. This is despite the responsibility of the Company Secretary as an advisor to the Board of Directors on such matters. We also note from the minutes of the Annual General Meeting that the shareholders did not interrogate the procedures regarding the changes to the ownership of the bank. Consequently, the Articles of Association of the bank were amended to reflect the unauthorised changes in the shareholding and voting rights without regard to the requirements outlined in the Banking and Financial Services Act.’’
Dr Chipimo said the Central Bank had concluded that the company secretary, members of the board, both collectively and individually, and the shareholders were all culpable for the chain of failures that led to the irregular and unauthorised changes to the shareholding structure of FAB.
He further cited six breaches committed by First Alliance Bank in the transaction in question.
“1. FAB breached section 25(1)(a) of the Banking and Financial Services Act when it effected the acquisition of beneficial interest in voting shares of the bank without obtaining prior approval of the Bank; 2. FAB breached section 27(3) when it effected the transfer of significant shareholding of the bank without the prior written approval of the Bank; 3. FAB acted negligently when it effected amendments to the Articles of Association to reflect the changes in shareholding and voting rights without the prior written approval of the Bank,” he said. “4. The Company Secretary failed in his duties to provide sound advice to the Board of Directors as required under directive 13.22 of the Banking and Financial Services Corporate Governance Directives; 5. The board members individually failed in their fiduciary duties to provide sound and proper governance of the bank by not interrogating whether senior management had followed proper procedures to effect the changes to the shareholding structure before signing the resolution to effect the changes in line with Directive 7.7 of the Banking and Financial Services Corporate Governance Directives; and 6. The shareholders did not exercise adequate oversight on the Board of Directors by not questioning whether the bank had followed all the appropriate procedures for effecting changes to the ownership structure of the bank…”
The Central Bank threatened to impose a monetary penalty of K5,258,400 tabulated according to respective offences.
Dr Chipimo warned that BoZ’s actions were not only limited to administrative sanctions listed above.
He said there could be possible prosecution and imprisonment of individuals.
‘’Under the circumstances, FAB Zambia Limited is therefore required to show cause in writing, why the BoZ should not impose sanctions as outlined above within seven (7) days from the date of this letter, failure to which the BoZ will proceed to debit your account held at BoZ with a total amount of K5,258,400 and subsequently begin the process to effect the removal of the company secretary and the board of directors of the bank. Please ensure that your responses address each of the specific issues raised in our letter,” said Dr Chipimo.