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Petitioner: MCB BANK LTD through Authorized Officer and another VS Respondent: STATE BANK OF JUDGMENT
Court Name: Lahore High Court Judge(s): Muhammad Khalid Mehmood Khan Title:MCB BANK LTD through Authorized Officer and another vs STATE BANK OF
JUDGMENT
Reported As: 2013 CLD 1895 Result: Petition allowed Judgment JUDGMENT ' MUHAMMAD KHALID MEHMOOD KHAN, J.---Through this constitutional petition, the petitioners have prayed as under:-- "It is therefore prayed on behalf of the petitioners and in the light of what is stated hereinabove, that this Hon'ble Court may be pleased to: (a) Declare that the SBP BPRD Circular 4 of 2008 is contrary to .Law and of no legal effect, is illegal, unlawful and void ab initio, and a nullity in the eye of law, and the SBP is not entitled to, directly or indirectly, enforce the same or take any action against anyone on the basis thereof or of further connected/ ancillary consequential demands. (b) Declare that the letters of SBP dated 16-9-2009, 20-10-2009 and 13-11-2009 and all other letters/ circulars containing the illegal demands referred to in the instant petition are contrary to law and of no legal effect, are illegal, unlawful and void ab initio, and a nullity in the eye of law, and the SBP is not entitled to, directly or indirectly, enforce the same or take any action against anyone on the basis thereof or of further connected/ancillary consequential demands. (c) To further declare that the SBP has no authority to artificially define the concept of sponsor shares to include shares acquired by non-sponsors and, in the open market or otherwise whether by way of bonus or right shares, or any other method whatsoever, and also that the concept of sponsor directors cannot similarly be artificially and illegally extended to shareholders who have acquired shares in the open market or by consent but is limited to the original remaining sponsor directors as per the Privatization Agreement and that the status of sponsor shares and sponsor directors remains unaltered.
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(d) To declare that the SBP circulars/directives/letters have no retrospective effect and hence are not enforceable. (e) To declare that the constitutional rights of the petitioners and the shareholders of the petitioners, including individuals as well as the corporate entities, are protected and cannot be impaired/restricted by SBP circulars, either directly or indirectly. (f) A permanent injunction restraining the SBP from enforcing BPRD Circular 4 of 2008, whether directly or indirectly, and from issuing any directive or orders or letters thereunder or in connection thereto to anyone and from refusing to decide cases relating to petitioner No,1 on the merits on the pretext of noncompliance of the above and from taking any adverse action against the petitioners and/or its directors or shareholders. 2. The petitioner No,1 is a banking company, doing banking business all over the Pakistan and abroad. The petitioner No,1 was operating under the name and style of Muslim Commercial Bank Ltd., since its incorporation. After 8-12-2005 is operating under the name and style of MCB Bank Limited (hereinafter referred to as "MCB"). The MCB asserts that its performance is excellent, its, ordinary share of Rs,10 is trading in the Stock Exchange of Karachi @ of Rs,190, the overall performance of MCB is up to mark in every respect and is contributing major role in the financial and banking sector of Pakistan. 3. On 2-4-1991 President of Islamic Republic of Pakistan entered in to an agreement of sale of 26% shares of MCB with a group of investors known as "National Group", the purpose for the sale of 26% ordinary fully paid shares was to privatize the MCB from Public to private Sector. Under the agreement in addition to the others terms and conditions, following condition was specifically agreed:-- "1.4 The purchasers expressly agree and confirm that it shall be a condition of the sale of the shares under this agreement that none of the shares mentioned under clause 1.3 above shall, for a period of three years from the date of this agreement be sold, gifted, transferred or in any manner dealt with by their respective owners, except as stated in clause 1.3 above, without obtaining prior consent in writing of the State Bank of Pakistan. " 4. That after taking over the management of MCB, the National Group appointed its 12 directors. In 1994, the Government of Pakistan granted permission to set up 12 new commercial banks in private sector. On 26-8-1997 the State Bank of Pakistan (hereinafter referred to as the SBP) issued circular No,44 addressing the Chief Executive, of 12 newly established Commercial Banks whereby condition was imposed against the sale of sponsor shares of these banks. On 21-4-2000 again State Bank of Pakistan issued Circular No, 11 on the same subject which too was addressed to 12 newly established banks but in violation of the agreement dated 2-4-1991, the SBP tried to impose Circular No,11 upon the shareholders/purchasers of the shares of MCB. 5. The MCB vide letter dated 20-6-2000 informed the SBP that two circulars referred to above are not applicable against its shareholders. The SBP again on 17-1-2003 addressed Circular No,2 to MCB along with other Banks seeking the details of "Pledge of Sponsor Directors shares, the MCB on 23-1- 2003 in good faith provided the required information to SBP however the SBP on 11-11-2003 illegally directed the MCB that "all sponsor shares be deposited with the Chief Manager, SBP Services Corporation (Banks) Karachi immediately." 6. The MCB asserts that its share holders decided to change the name of Muslim Commercial Bank Limited to MCB Limited, the Security Exchange Commission of Pakistan accepted the petitioner's request, the petitioners then requested respondent No,1 to implement the change of its name in their record and issue certificate thereof, the respondent No,1 instead of changing the name of Bank, cancelled its banking license illegally and issued a new license by inserting unilateral conditions against the terms of sale and purchae agreement, the petitioner further asserted that respondent No,1 is discriminating the petitioner Bank, the respondent No,1 has caused loss to
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petitioner by sabotaging the proposed purchase of two foreign banks and illegally permitted one influential business group to purchase the private Banks and appointed a person of its Chief Executive against whom criminal case is pending before a Court of Law. In this background, the petitioner challenged the cancellation of banking license and the legality of SBP/BPRD Circular No,4 of 2008 dated 22-5-2008 and all other acts of SBP taken in pursuance of the circular dated 22-5- 2008. 7. The respondent No,1 controverted the petitioner's assertions and submits that respondent has not violated any law, the respondent No,1 being the regulatory authority under Banking Companies Ordinance 1962, enjoy the powers to regulate the affairs of all Banks operating in Pakistan being the custodian of the rights of depositors. 8. Learned counsel for petitioners submits that BPRD Circular No,4 dated 22-5-2008 is a bad law, has been issued with mala fide intent to cause loss to MCB, the impugned circular is in excess of jurisdiction conferred upon the respondent No,1 by Law. The respondent No,1 has no powers to issue any instructions or circular in violation of Banking Companies Ordinance 1962 and State Bank of Pakistan Act of 1956, the successive circulars issued by respondent No,1 directing MCB to deposit sponsor shares with State Bank in blocked account are without jurisdiction and lawful authority and are in violation of agreement dated 2-4-1991. The share holders enjoy rights independently and no clog can be put against the rights of share holders, the impugned circular is against the fundamental rights of share holders. The rights and liabilities of share holders are governed under the Companies Ordinance 1984 and Company Memorandum and Articles of Association, the respondent No,1 has no powers to issue any instructions against the statutory and guaranteed rights of share holders of MCB. The impugned Circular No,4 issued in supersession of Circulars Nos.11 and 44 and letters dated 24-10-2001 and 28-9-2004 are not applicable to petitioner's bank, the respondent No,1 has issued the impugned circular without Proper application of mind. Learned counsel contends that it is settled principle of law that when the statute directs something to be done in particular manner, it can only be done in that manner and not otherwise. The impugned circular is in violation of section 14 of the Banking Companies Ordinance 1962. Learned counsel vehemently argued that only Parliament has the powers to legislate with retrospective effect and the regulatory authority has no powers to issue any direction or instructions with retrospective effect. The change of name is only a formality and has nothing to do with the banking license and as such the act of respondent No,1 to issue new license is against law. The insertion of word 'major shareholder vide impugned circular amounts to enlargement of sponsor shareholders definition illegally. The impugned circular is in violation of the guaranteed rights of individual and Companies who have invested the money for the purchase of MCB shares from open market and as such the impugned circular is against the right of free trade of an individual and companies. The respondent No,1 has wrongly interpreted the word "dependent", an independent, major person cannot be termed as the dependent. Learned counsel adds that share holders and company are two independent juristic entities and the company cannot force the individual share holder to deposit his shares in bank account. Learned counsel has relied on Mian Muhammad Nawaz Sharif v. President of Pakistan and others (PLD 1993 SC 473), Safeer Travels (Pvt.) Ltd. Through Chief Executive Safeerul Islam v. Muhammad Khalid Shafi through Legal Heirs (PLD 2004 SC 690), Messrs Armu Welfare Sugar Mills Ltd. And others v. Federation of Pakistan and others (1992 SCMR 1652), Collector of Customs (Appraisement) v. Messrs Saleem Adana, Karachi (PLD 1999 Karachi 76) and Federation of Pakistan and others v. Shaukat Ali Mian and others (PLD 1999 SC 1026). 9. Learned counsel adds that section 503(1)(6) of the Companies Ordinance 1984 provides that provisions of Ordinance 1984 will apply to the Banking Companies, section 2 of the Banking. Companies Ordinance 1962 provides that its provisions are in addition to and not in derogation of
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the law relating to companies save and except to the extent expressly provided therein, thus the impugned circular qua the share holders of a banking company is against law. 10. Learned counsel for respondent No,1 has raised the preliminary Objection about the maintainability of constitutional petition on the ground that impugned circular was issued on 22-5- 2008 and the petitioner has filed the petition after the lapse of two years. The so called dispute is already sub judice before a competent court of law in Suit No,77 of 2001 pending before Sindh High Court, the impugned circular has been issued in accordance with the provisions of Banking Companies Ordinance 1962. The impugned circular has been issued to. Protect the interest of depositor of banks. It is the legal duty of respondent No,1 to ensure that public money is controlled and managed by responsible and competent persons. The restriction to sell the share has been imposed in the larger interest of depositors, notwithstanding the Circular applicable in the year 1997, the sponsors of banking companies were selling the sponsor's shares to incompetent persons, that is the reason, the business of Indus Bank, Bolan Bank and number of other financial institutions were flopped. Learned counsel contends that impugned circular is only a check for safe guarding the rights of depositor, the agreement to sell and purchase has to be read as a whole and not in isolation. Learned counsel adds that in fact it is the share holders who elect the management of the Banking Company and as such the State Bank is enjoying the powers to issue instructions to the management for not to do illegal acts. 11. Heard, record perused. 12. The agreement dated 2-4-1991 (hereinafter referred to as AGREEMENT) is an admitted document between the parties, before entering into agreement, the entire share holding of Muslim Commercial Bank (MCB) was with the Federal Government, In April 1991, the Federal Government offered 26% share holding of MCB for sale to public at large, the National Group bid was finally accepted and the purchasers took over the management of MCB. 13. The MCB was incorporated in the year 1966 under the then Company Act 1913 as banking company in private sector, it was Nationalized under the Banks (Nationalization) Act 1974, under section 5 of the Act of 1974, the entire share holding, ownership, management and control of the MCB stood vested in Government of Pakistan. The Act of 1974 was amended by the Banks (Nationalization) Amendment Ordinance 1991. In the year 1991, the Government of Pakistan offered 26% share holding of MCB for sale to public at large. The twelve interested individuals formed a group under the name and style of National Group for participating in the bid. 14. The main argument of learned counsel for petitioner is that shares of MCB are not the sponsor shares, the directors who are the owners of required shares are not the sponsor directors and as such the impugned circular and other directives/instructions are not applicable on MCB, for ascertaining the above said fact it has to be seen what is the status of the shares of MCB. 15. The Government of Pakistan issued pre bid instruction on 2-1-1991 for the bidders as under:-- "BIDS FOR MCB ' Please refer to your Bid for acquiring 26 percent shares of Muslim Commercial Bank. (1) . (2) In order to enable the Committee constituted by the Government to evaluate the Bids, you are requested to please furnish information as in the enclosed proforma by 4-00 p.m. On Friday the 4th January, 1991 to the undersigned in this office. (3) In this connection, we would also like to inform you of the broad terms and conditions' from the side of the Government for the purpose of proposed sale of shares: (III) Bidder shall undertake to manage the floataton, underwriting and subscription of the 25% of the shares capital at the bid price in such manner as to ensure that disinvestment of the 51% of the share capital is completed before 30th June, 1991.
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(IV) Till such time the transfer of 25% of the shares as at (iii) above is complete the GOP/ SBP will not use its voting rights to disturb the management control of the bidders. (V) Till such time the balance 49% of the share capital is not disinvested to the general public, the State Bank of Pakistan will exercise its voting rights through proportionate representation on the Board of Directors of the Bank subject to (iv) above. (vi) The balance of 49% shares shall be offered to the general public in two tranches at appropriate time but not earlier than 30th June, 1992. In case the buyer has less than 50% shares up to this time, he would have the option to buy the balance out of the third tranche at the bid price. (VII) .. (viii) The bank shall follow/comply the instructions issued under the Banking Ordinance, 1962 in respect of various matters including write-offs, opening, transfer of branches, restrictions on loans and their concerns, etc. Directives / Companies operational closure or to directors Yours faithfully, Sd/- (R.A. Chughtai) Director." 16. The Government of Pakistan finally accepted the bid of National Group and on 2-4-1991 an agreement for the sale of 26% share holding of MCB was executed between the President of Pakistan and National Group. In addition to the other terms and conditions, it was specifically agreed as under:-- "1.3 The Government has agreed to sell and the purchasers have agreed to purchase in the name of each of the member of the Group and/or their nominees the number of shares as shown against each: 1. Mian Muhammad Mansha1,248,224 shares 2. Muhammad Abdullah 1,248,216 shares 3. S.M. Muneer 1,248,216 Shares 4. S.M. Saleem 1,248,216 Shares 5. Hajee Bashir Ahmed 1, 248,216 shares 6. Tariq Rafi 1,248,216 Shares 7. Muhammad Naseem 1,248,216 shares 8. Muhammad Arshad 1,248,216 Shares 9. Sheikh Mukhtar Ahmed 1,248,216 Shares 10. Saqib Ellahi 1,248, 216 Shares Muhammad Bashir Jan Muhammad1,248,216 Shares 12. Khawaja Muhammad Jawed1,248,216 shares ' The purchasers shall be at liberty to transfer their respective share holding to their family member and/or group companies in which the purchaser(s) hold a controlling interest provided, however, that the purchaser or purchasers, as the case may be, shall always hold complete control and right of disposition of the said shares by legal instrument and shall personally exercise voting rights in respect thereof. 1.4 The purchasers expressly agree and confirm that it shall be a condition of the sale of the shares under this agreement that none of the shares mentioned under clause 1.3 above shall, for a period of three years from the date of this agreement be sold, gifted, transferred or in any manner dealt with by their respective owners, except as stated in clause 1.3 above, without obtaining prior consent in writing of the State Bank of Pakistan."
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17. After the finalization of transaction of sale, the management of MCB was transferred to National Group, all the 12 members of group then were appointed directors of MCB. 18. In 1997 the Government of Pakistan granted permission for establishing twelve (12) commercial banks in private .Sector, accordingly twelve (12) banking licenses were issued to persons/groups found eligible to establish the bank. The license issuing authority issued Banking License with conditions including the following condition:-- "(vi) Sponsor-Directors shall not dispose of their shares in any manner whatsoever for an initial period of three years and thereafter only with the specific written approval of the State Bank. " 19. On 26-8-1997 the State Bank of Pakistan issued Circular Nos.44 to 12 private banks directing as under:- "In exercise of the powers conferred on SBP under section 41 of the Banking Companies Ordinance, 1962, Chief Executive of each of the private sector banks and all sponsor directors of such banks are hereby directed to ensure as under:- (a) To mark prominently all the Sponsors Shares with the words "Not transferable without specific approval of the State Bank of Pakistan". (b) Write to all Stock Exchanges in Pakistan with copies to the. State Bank of Pakistan advising them of the particulars of the Sponsors Shares and further advising them not to allow dealing in the Sponsors Shares since such dealing is in contravention of the permission granted by the Government of Pakistan for establishment of the bank and also in contravention of the conditions stipulated in the Licence issued by the State Bank of Pakistan under section 27 of the Banking Companies Ordinance, 1962. (c) Directions contained above must be complied with within a week's time and the State Bank of Pakistan be simultaneously advised of such compliance." 20. On 21-4-2000 the State Bank of Pakistan issued Circular letter Nos.11 to 12 private established Commercial Banks as under:-- "PURPORTED SALE BY SPONSOR DIRECTORS ' Please refer to our BPRD Circular letter No,44 dated the 26th August, 1997 on the captioned subject. (2) In light of the fact that shares of the banks are now handled under Central Depository System ("CDS'), it is considered appropriate to issue following further directives for compliance by Chief Executives of each of the private sector banks and Sponsor Directors of such banks: (a) To confirm to the State Bank within five days from the date hereof that Sponsors Shares have not been deposited in CDS. (b) If sponsors shares have been deposited in CDS, then: (i) they should be withdrawn forthwith: and (ii) provide explanation to the State Bank within ten days from the date hereof as to why Sponsors' shares were deposited in CDS notwithstanding the restrictions to their transferability. (c) In order to ensure that Sponsors' Shares are not wrongfully placed in the market, it has now been decided that the same should be deposited in safe custody with the Chief Manager of SBP Karachi Office within ten days from the date thereof. (3) Above directives are issued in exercise of powers conferred on the State Bank under section 41 of the Banking Companies Ordinance, 1962. Chief executives of each of the private sector banks and all Sponsor Directors of such banks are required to meticulously comply with the same." 21. All the above mentioned Circulars were remained operational and on 22-5-2008 the State Bank of Pakistan issued BPRD Circular No,4 of 2008 dated 22-5-2008 (Impugned Circular) by superseding all previous Circulars and letters as under:-- "DEPOSIT OF ' SPONSOR SHARES IN BLOCKED ACCOUNT WITH CENTRAL DEPOSITORY COMPANY OF PAKISTAN (CDC) ' Please refer to the State Bank's letter No,BPD(PU-33)682-22(ii)/ 2004/ 12355 dated the 28th September, 2004 and other instructions issued from time on the above subject.
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(2) In order to ensure continued take/ ownership of sponsors/major shareholders in the banks, they were require to deposit their shares in a blocked account with central Depository Company of Pakistan (SBP) that sponsor shareholders of certain banks have either not fully deposited their sponsor shares or have not deposited their subsequent bonus/right shares in the CDC or have. Availed financing form financial institutions against the pledge of their sponsor shares. This has been viewed seriously by the SBP. (3) With a view to facilitate the banks and their sponsor shareholders and to ensure compliance of the SBP instructions, it has been decided to issue the following consolidated and revised instructions on the subject:.. (i) All sponsor shares and subsequent right and bonus shares, including those deposited with SBP Banking Services Corporation (BSC), shall be deposited in a blocked account with CDC. The procedure for deposit of sponsor shares in the CDC blocked account is provided in enclosed Annexure-A. (ii) No withdrawal of the sponsor shares from the blocked account would be allowed without prior written permission of SBP. (iii) Blocked account should be opened by the sponsor shareholders of banks exclusively for deposit of the sponsor shares and subsequent right and bonus shares issued thereon. (iv) Charges for opening and operating of the blocked account with CDC will be borne by the sponsor shareholders. (4) For the purpose of these instructions, the "sponsor shares" and sponsor shareholders" shall have the following meanings: (i) Sponsor shares mean 5% or more paid-up shares of a bank, acquired by a person(s) individually or in concert with his family members (including his spouse, lineal ascendants and descendants and dependent brothers and sisters), group companies, subsidiaries, and affiliates / associates. Such acquisition of shareholding will include. All the shares acquired by aforesaid person(s) including, inter alia, through (c) market based acquisition deal; (d) reconstruction/ restructuring of a banking companies; or (g) any other mode of acquisition. All shares acquired by common shareholders, who are also sponsor shareholders, of amalgamating banking companies in amalgamation transaction shall be considered Sponsor Shares. (ii) Shareholders mean all those shareholders of a bank holding sponsor shares. The members of the Board directors of a bank holding sponsor shares will be considered Sponsor Directors. (5) These instructions shall not be applicable to the shareholding of Federal and provincial governments in banks. (6) The above instructions have been issued in exercise of the powers conferred on SBP under the Banking Companies Ordinance, 1962. All the banks are advised to ensure meticulous compliance of these instructions. ' Banks which are already in compliance of these instructions shall confirm the same in writing to SBP through their Company Secretary. (7) The above instructions shall supersede BPRD Circular Letters No, 44 dated 26th August, 1997, No,1 dated 3rd January, 1998 and No,11 dated 21st April, 2000 and letters No,BPRD (RU-28)/682-22(W 15315/2001 dated 24th October, 2000 and BPD (PU-33)682-22(11)/2004/12355 dated 28th September, 2004." 22. The State Bank of Pakistan under the Impugned Circular directed MCB to comply with the directions of Impugned Circular. The petitioner's argument is that the shares of MCB sold vide agreement date 2-4-1991 are not the sponsor shares, hence the impugned Circular No,4 of 2008 dated 22-5-2008 is against their fundamental right to trade and business of the share holders of MCB and further is in violation of the agreement of 'sale and purchase between…
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