THE State Bank of Pakistan (SBP) advised banks, microfinance banks (MFBs) and development financial institutions (DFIs) on April 22 to suspend the distribution of profits by way of dividends in any manner (cash or stock) for the quarter ended on March 31 and the half year ending on June 30.

But the trouble is that MCB Bank, United Bank, Habib Bank and Allied Bank have already unveiled their first-quarter financial results and declared cash dividends. A large number of investors who bought these shares to earn dividends, which inevitably increased stock prices, are now grumbling.

The central bank realised its mistake and issued a clarification afterwards: “The banks that approved the dividend for the March quarter on or before April 22 are allowed to implement the dividend pay-out decision taken by their respective boards.”

The SBP clarified that these banks will not declare dividend for the quarter ending on Sept 30.

Banking companies are regulated by the Banking Companies Ordinance of 1962. Its section on the restrictions on the payment of dividend states: “If the State Bank of Pakistan (SBP) is satisfied that conditions are not favourable for such payment, or the financial position of a banking company so warrants, it may, by order in writing stating reasons, restrict or prohibit any banking company from paying dividends to its shareholders for such period as may be specified in the order and the SBP shall exercise the power reasonably, fairly and justly.”

It adds, “No order shall be made unless the banking company concerned has been given an opportunity of making a representation to the SBP and where the SBP is of the opinion that any delay would be detrimental to the public interest or the interest of the banking company or its depositors, the SBP may, at the time of giving the opportunity aforesaid or at any time thereafter and pending the consideration of the representation aforesaid, if any, make an appropriate interim order.”

The apex regulator should have stood up to uphold the rights of the banks’ shareholders, says a former SECP chairman

Khalid Mirza, former chairman of the Securities and Exchange Commission of Pakistan (SECP) and the Competition Commission of Pakistan (CCP), maintains that the SBP decision to restrict banks from paying dividends to shareholders is “unjust, unfair and against the law”.

Mr Mirza was chairman of the SECP Policy Board until last Tuesday when he resigned. But he still retains his seat as member of the board. He points out that the particular section of the Banking Companies Ordinance refers to a “single banking company”. It also directs that the bank concerned should have the opportunity of making representation and requires that the exercise of power by the SBP should be reasonable, fair and just. “Sweeping instructions for all banks should not have been given for they trample on corporate affairs, unjustly intervene in the affairs of corporate boards and violate the principles of (corporate) governance,” he said.

Mr Mirza said he was appalled by the deafening silence of the SECP. “The regulator should have stood up to uphold the rights of the shareholders,” he affirmed. Many major shareholders in banks, who also thought the move was unfair, wondered if the apex regulator had been consulted by the SBP at all. When Dawn reached out to the SECP, its spokesperson declined to comment on the matter.

On April 22, the External Relations Department of the SBP tried to calm the investor community by explaining the need for the ban on dividends. “This important decision has been taken keeping in view the uncertainty arising out of the Covid-19 pandemic and the probability of higher infections in loan portfolios of banks as a result of that,” the central bank said. It added the measure would enhance the loss absorption capacity of the banking system and enable banks to further support the real sector in Pakistan. “We are confident that the suspension of dividend payout will further increase the resilience of the banking sector and improve its ability to provide much-needed credit to the real economy,” the SBP stated.

The Pakistan Stock Exchange (PSX) Brokers’ Association criticised the bar on dividend distribution. A letter by its general secretary, Ghulam Mujtaba Sakarwala, to SECP Chairman Aamir Khan said, “Investors are entitled to receive dividends as a return on their investments made in a company and taking the risk of putting money in shares.”

The association went on to explain that dividends were “an important source of income for small and middle- class investors who rely upon it to meet their household expenses”. It lamented that in the current scenario when all businesses and other means of livelihood were closed, the importance of dividend was a lot more for small investors. “The power to declare dividends rests with the company (boards), which was why the decision of the issuance and/or suspension of dividend might be left to the discretion of respective banks/companies in order to facilitate investors in the current hardships.”

A corporate lawyer from Lahore mused on the validity of the SBP instructions without offering a judgment: “desperate times call for desperate measures.” And precedents do exist. The Reserve Bank of India (RBI) on April 17 barred banks from paying dividends for the fiscal year that ended on March 31. RBI Governor Shaktikanta Das was reported to have said that it would help banks conserve capital to help absorb the economic shock caused by the Covid-19 pandemic.

The European Central Bank on March 28 asked eurozone banks to freeze dividend payments until at least October 2020 to preserve liquidity that can be used to help households and companies through the coronavirus crisis. In early April, the Bank of England ordered the country’s leading banks to cancel the dividends they had proposed for 2019 and secured pledges from them to not make investor payouts this year, including share buybacks.

Published in Dawn, The Business and Finance Weekly, May 11th , 2020