Supreme Court Rules Bank Directors, CEOs Issued Warnings Ineligible

Kathmandu. The Supreme Court has interpreted that bank and financial institution directors and chief executive officers (CEOs) who have been 'warned' or 'reprimanded' by the Nepal Rastra Bank are ineligible for the post. The full text of the verdict, delivered by a joint bench of Justices Dr. Nahakul Subedi and Nripadhwaj Niroula, was recently made public.

The Supreme Court established this precedent while hearing a writ filed by advocate Madhukumar Chaulagai against the Nepal Rastra Bank, various commercial banks, and their directors and CEOs.

The Supreme Court's verdict states, 'A person whose five-year period has not elapsed since being penalized for acting against the law under Section 18(1)(e) of the Bank and Financial Institutions Act (BAFIA), 2073, is not eligible to be a bank director.'

The Supreme Court did not issue a 'mandamus' to immediately remove the concerned officials from their posts as per the petitioner's demand. It stated that since the Nepal Rastra Bank had not directly issued a decision to remove them (as per Section 100, Sub-section 2, Clause 'e'), the court could not directly remove them, and thus dismissed the writ. However, the court issued a directive order in the name of the Nepal Rastra Bank stating, 'Send a letter to the concerned banks and financial institutions to ensure mandatory compliance with the legal provisions regarding the ineligibility of directors and officials of banks and financial institutions, and effectively monitor whether it is being complied with or not.'

The court clarified that actions such as 'warning' or 'reprimand' given under Section 100 of the Rastra Bank Act, although appearing to be of a general nature, are indeed actions taken by the regulatory body. The court determined that it would be against the good governance of the banking sector and the interests of general depositors for individuals who have faced such actions to remain as directors or officials.

The court clarified that all penalties given under Section 100 of the Rastra Bank Act (from warning to removal from office) are given precisely because of violating laws or directives. Since the law does not classify these penalties as 'general' or 'special', the court concluded that individuals who receive a warning or reprimand also become ineligible.

Section 100 (2) of the Rastra Bank Act, clauses (a) to (d), include penalties such as warnings and fines. However, a separate special provision exists in clause (e) for 'removal' from office, according to which the Rastra Bank must order the removal of the board of directors of the concerned bank. If individuals were automatically removed upon being warned, there would be no need for a separate penalty provision for removal. Therefore, if the Rastra Bank has not issued a clear order for removal, the court cannot directly remove them, which is why the writ was dismissed.

BAFIA Section 18(1)(e) clearly states that any person is ineligible to become a bank director until five years have passed since being penalized by the regulatory body, which also applies to CEOs. Since a warning from the Rastra Bank is considered an action, such individuals are no longer eligible to remain as directors or chief executive officers.

The court's basis is that the banking and financial sector is sensitive and involves public money, therefore, legal provisions must be strictly adhered to for banking good governance and protection of depositors' interests. The court determined that the public's trust in the financial system would be lost if individuals who have faced penalties remain in office.

The writ had named directors and chief executives of Prabhu Bank, Global IME Bank, Himalayan Bank, Nabil Bank, NIC Asia Bank, Kumari Bank, Prime Commercial Bank, Garima Bikas Bank, and Reliance Finance as respondents. The Nepal Rastra Bank had issued warnings or reprimands to some officials of these institutions in the fiscal year 2080/81 for various regulatory violations.