Stakes have raised in the high profile KASB Bank amalgamation that took place over two years ago as the National Accountability Bureau’s (NAB) Executive Board is set to consider converting the current inquiry into a formal investigation.
An inquiry report of NAB had stated that undue favours were extended in the amalgamation that saw BankIslami take over the now defunct KASB Bank for a nominal amount of Rs1,000.
Last month, in a report to parliament, the office of Auditor General of Pakistan had also confirmed that the central bank unduly favoured BankIslami at the cost of public funds. The Public Accounts Committee is set to start discussions on thousands of audit objections on the accounts of fiscal year 2015-16 from next month and objection on the KASB Bank deal is one of them.
The NAB’s Executive Board Meeting will consider a recommendation of NAB’s Karachi regional office to convert the inquiry into an investigation, said sources in the bureau. The NAB, which ordered the inquiry in September 2015, has decided to take the matter to its logical end by rejecting pressure it is facing from various quarters, said the sources. The central bank’s decision to hand over the bank to BankIslami had surprised many, particularly when the SBP gave Rs20 billion cash support to the buyer, which is now the centre of the probe.
The NAB inquiry has accused seven top officials of the SBP including then governor Ashraf Wathra and two persons attached with AF Ferguson of concluding a “non-transparent amalgamation of KASB bank into BankIslami and grant of Rs20 billion concessional loan by SBP to BankIslami”. AF Ferguson had been hired to evaluate KASB Bank despite the fact that the chartered accountancy firm was also the external auditor of the SBP.
The Institute of Chartered Accountants of Pakistan – the apex regulatory body of accountants – has so far maintained its silence on the role of AF Ferguson in the KASB deal.
In its report, the department of the AGP has pointed out that the central bank sustained Rs435 million in losses due to grant of a Rs5-billion concessionary loan to BankIslami.
However, the AGP could not detect a Rs3-billion loss that the central bank sustained by giving Rs5-billion loan at an exceptionally low rate of 0.01% per annum for 10 years to BankIslami.
The AGP auditors could not detect the loss as the central bank showed it under the head of other operating incomes instead of explicitly showing Rs3 billion under the head of expenditures, showed the SBP balance sheet for fiscal year 2014-15.
The central bank booked the amount as “Fair value adjustment on recognition of subsidised loan of Rs2.952 billion”, duly stamped by its external auditor. By doing so, the SBP showed it fiscal year 2014-15 other operating income at Rs103.34 billion, which otherwise could have been Rs106.3 billion.
This gives rise to speculation over the motives behind hiring AF Ferguson by the central bank, according to the NAB sources.
The KASB sponsors have time and again expressed reservations over the central bank’s decision to give the valuation task to AF Ferguson. They argued that the external auditor was not independent due to various reasons including the fact that it accepted the assignment of Financial and Tax Due Diligence of KASB Bank and at the same it was the auditor of SBP as well as BankIslami.
There also existed a dispute between SBP and KASB Bank and its sponsors on its valuations, a fact which created clear conflicting position for the AF Ferguson as mentioned in the Code of Ethics for Chartered Accountants, according to NAB sources.
While valuating the worth of the defunct bank, AF Ferguson did not take into account all aspects such as market based value of KASB Bank shares, recoveries of fully provided NPLs against securities of Rs10 billion and tax losses of Rs10.8 billion available to the acquiring bank, according to the sponsors. The market value of 61 million shares of Shakarganj Food Ltd, based on sector multiples, about Rs6.5 billion; estimated appreciation of Rs1 billion in real estate owned by the Bank and offers received for HUB Property were not considered by the AF Ferguson, according to them.
KASB financial statements showed that it had Rs28 billion of investments, which included Rs23.5 billion of Treasury Bills. The BIPL sold these treasury bills on the very first day and netted a gain of Rs380 million as shown in the half yearly results of BIPL June 30, 2015.
Senior officials of the State Bank of Pakistan took harsh action and “misused their authority” in amalgamating KASB Bank into BankIslami for just Rs1,000, reveals an inquiry report of the National Accountability Bureau (NAB).
The report further disclosed that BankIslami was not capable of handling the now-defunct KASB Bank without the central bank’s financial support. Moreover, the central bank’s decision to award KASB Bank’s due-diligence contract to AF Ferguson, a chartered accountancy firm, was an “illegal act”.
“Officers of the SBP and others misused their authority to refuse foreign investment of $100 million in KASB Bank and favoured BankIslami Limited by amalgamating it at a token price of Rs1,000 only,” according to inquiry findings.
The Cybernaut Investment Group of China had offered up to $100 million investment to bridge the capital shortfall faced by KASB Bank, but the SBP rejected the offer.
The assets of the defunct KASB Bank were not valued at market rate, according to the inquiry. At Rs1,000, BankIslami got billions of rupees in assets, it added. Not only that, BankIslami also got Rs5.8 billion as deferred tax that benefitted its balance sheet.
Investigators have now recommended the NAB headquarters to order an investigation. The inquiry report had been submitted in December last year.
NAB spokesman Nawazish Ali Asim did not respond to questions regarding the next step in the case. The SBP spokesman’s response was also awaited, although in the past the central bank has defended its action of amalgamating the bank, saying it had the legal mandate.
On May 7, 2015, the SBP merged KASB Bank into BankIslami after the former could not meet the statutory paid-up capital requirement of Rs10 billion. The now-defunct bank was facing capital shortage since 2009, although it had a sound deposit base, which the NAB inquiry also confirmed.
There was no point in merging KASB with BankIslami, as other remedies were also available with the SBP, according to the inquiry report. It added the amalgamation was a harsh step on part of the SBP, which nullified billions of rupees investments of KASB shareholders.
The NAB inquiry further noted that the Rs20 billion as financial assistance could also have been provided to KASB Bank by appointing administrator and changing the board.
“The SBP has committed offence of misuse of authority as envisaged in Section 9(a) (iv) of NAO Ordinance, and investigation may be authorised against the accused persons,” the NAB investigators recommended to the headquarters.
“A holder of a public office, or any other person, is said to commit or to have committed the offence of corruption and corrupt practices – if he by corrupt dishonest, or illegal means, obtains or seeks to obtain for himself, or for his spouse and/or dependents or any other person, any property, valuable thing, or pecuniary advantage,” reads the relevant section of NAO.
Insider trading
The inquiry report observed that the decision to amalgamate the bank with BankIslami had taken a year before the amalgamation took place. Investigators said that the Al Karam Group, Ismail Industries, owned by Miftah Ismail family, and Ali Hussain, chairman of BankIslami, started increasing their shareholding in BankIslami from April 2014. They investigators said that this is “evident from the CDC record”.
Role of AF Ferguson
The NAB also launched an inquiry against a partner of AF Ferguson and one of its directors in the same case. The chartered accountancy firm had been accused of giving a favourable report.
“The selection of AF Ferguson and signing of tripartite agreement was an illegal act of the SBP,” according to the inquiry.
A minority shareholder of the KASB Bank, Shaheena Wajid Mirzan, had alleged that by paying Rs20.5 million as consultancy fees to AF Ferguson, the SBP got a totally fraudulent valuation report from the chartered accountancy firm. She further alleged that the Rs1,000 valuation wiped out 1.95 billion shares, held by 9,000 shareholders.
Nasir Bukhari, who had 43% stake in the defunct KASB Bank, at the time also highlighted the issue of conflict of interest, saying AF Ferguson was also the auditor of SBP and BankIslami, therefore, its Rs1,000 valuation report could not be considered impartial.
The then KASB president, Bilal Mustafa, gave a statement to NAB that the SBP summoned him and forced to sign a tripartite agreement at 12 midnight with AF Ferguson and SBP for conducting KASB’s due diligence at a hefty fee of Rs20.5 million. He told NAB that the market fee of this task was hardly Rs5 million
Mustafa further told NAB that selection of AF Ferguson at exorbitant fee that too without any tender was “not understandable”.
The inquiry report revealed that the SBP also forced the KASB Board Secretary Hameedullah to change the minutes of a meeting in which directors raised concerns about paying high fee to AF Ferguson.
Other players
While citing a statement given by the KASB Director, Muzzafar Bukhari, the NAB report noted that the KASB authorities were in sell-off negotiations with SAMBA Bank, which backed out and the SBP official asked it to stay away from entering into any deal, revealed the report.
SBP reply to NAB
At the inquiry stage, the SBP took the position that “interest of shareholders is not the mandate and responsibility of the SBP and they are only concerned about the interest of the depositors”, revealed the report. The SBP further stated that its actions were in line with powers available to it under the Banking Companies Ordinance.
However, NAB did not accept its response, saying the KASB Bank faced no liquidity issues and was, in fact, the most liquid bank in Pakistan due to Rs20 billion of Iranian deposits.
Reply contradiction
The SBP’s reply to NAB was contrary to what it wrote in its scheme of amalgamation. “In the case of amalgamation of banking companies, the rights of shareholders are fully protected by the Banking Companies Ordinance 1962 and the Companies Ordinance 1984”, according to the documents.
