Dhaka, Bangladesh (BBN) – The central bank of Bangladesh has asked the commercial banks to run their merchant banking business through separately formed subsidiary companies, officials said.

“No bank will be able to operate their merchant banking business without forming a separate subsidiary company,” the Bangladesh Bank (BB) said in a circular, issued on Wednesday.

Under the new regulations, the banks will have to convert their existing merchant banking wing or department into a separate subsidiary company by January 31, 2010.

The central bank took the latest move against the backdrop of violation of section 26(2) of the existing bank companies act by some of the commercial banks, the BB officials added.

Under the existing act, no bank company shall be empowered to hold shares of other companies whether as pledge or mortgage or exclusive owner of an amount exceeding namely –a) thirty per cent of the total amount of the paid up capital and reserve of the said company and b) thirty per cent of the paid up capital of the said company.

Provided further that the amount of the shares fixed by any bank company shall, in total, not exceed 10 (ten) per cent of its whole obligations, the act said.

“We found that some banks were not complying with the existing rules in cases of investment in shares of various companies,” a BB senior official told BBN, adding that the central bank has invited the banks for seeking permission to form a subsidiary company for running their merchant banking operations properly.

The BB officials also said at least five commercial banks have meantime received permissions from the central bank to form separate subsidiary companies for operating merchant banking business.

The banks are: Janata Bank Limited, BRAC Bank Limited, City Bank Limited, Premier Bank Limited and Mutual Trust Bank Limited.

“Issuing one more permission to a private commercial bank is now under process,” another BB official, adding that the central bank has taken the move aiming to protect the depositors interest in line with the existing bank companies act.

If a bank wants to finance a company, of which more than 15 per cent paid up capital is held by merchant banks and its client in aggregate, then prior approval of the BB will be required, according to the circular.

“The subsidiary company shall also maintain existing rules and regulations, earlier introduced by the Securities and Exchange Commission (SEC) to run their merchant banking business properly,” the BB official added.

Bankers, however, welcomed the BB’s latest move, saying that formation of separate subsidiary company would help to ensure transparency of the merchant banking business.

“Monitoring and supervision of the merchant banking operations will be transparent under a separate subsidiary company,” Managing Director and Chief Executive Officer of the Agrani Bank Limited Syed Abu Naser Bukhtear Ahmed told BBN in Dhaka.

He also said the board of directors of the Agrani Bank Limited has, in principle, approved to form a separate subsidiary company by December this year to run merchant banking business properly.

BBN/SS/SI/AD-15October09-1:08 pm (BST)