New Communiqué on Debt Securities To Be Included In Calculation of Banks’ Equity

• when calculating amounts to be written off, decreased or converted into shares, the debt security’s nominal value will be taken into consideration, whereas in case of loans, the amount of principal stated in bank records will be taken into consideration;
• if there are several debt securities, the share of each debt security within all debt securities that are included in calculation of additional principal capital or secondary capital, will be taken into consideration;
• payments of dividends and interest, prepayments and discharge will be based on the remaining balance of the amount whose value decreased or was converted into shares; and
• if a bank’s operation permit is revoked or a bank is transferred to the Saving Deposit Insurance Fund (“SDIF”), debt securities that were taken into account while calculating the bank’s equity capital and whose values were decreased will not be subject to value increase.If debt securities are converted into shares, the following conditions must also be fulfilled: (i) a general assembly resolution must be taken to issue new shares; (ii) the relevant institutions (such as the BRSA and Capital Markets Board) must have issued preliminary permits to immediately issue new shares as stated in the agreement or issuance certificate; and (iii) the agreement or issuance certificate must contain the conversion rate and maximum amount of shares to be issued as a result conversion, the conversion interval, along with the method of calculation for the shares price. Further, banks will not be entitled to convert debt securities into preferred shares.

  If debt securities are converted into shares and as a result, a person obtains shares that surpass or fall below 10%, 20%, 33% or 50% of the bank’s capital, the person must possess the qualifications required for a bank founder and must obtain permission from the Banking Regulation and Supervision Board (“Board”) in order to exercise its shareholder rights, except for the right to receive dividends.

  Until the person obtains this permission or if they do not obtain permission, they are granted six months to dispose of these shares. During this period, all shareholder rights (except for the right to receive dividend) will be exercised by the SDIF upon a notice to be made the BRSA’s to the SDIF.

  If a bank’s individual or consolidated core capital adequacy ratio falls below 5.125% in relation to a debt security included in the calculation of additional principal capital,

• the bank must immediately inform the BRSA and the holder of the debt security;
• amount of the debt security to be written off, to be subject to value decrease or to be converted into share will be determined within one month (the Board is entitled to change this period); and
• the debt security subject to decrease in value may be subject to value increase.

In order to increase the value of a debt security that was subject to temporary value decrease, the following conditions must be fulfilled: (i) the increase must be performed based on the bank’s net profit for the relevant period; (ii) the total increased value and dividend or interest to be paid based on the decreased principal (nominal value of the debt security before decrease in value ÷ the amount of bank’s capital) must not exceed the amount to be calculated by x (banks’ distributable net profit for the period); and (iii) the share of each debt security within the total of debt securities that were subject to value decrease will be taken into consideration.

The value increase made following the temporary value decrease and dividend and interest to be paid based on the principal amount will be considered distribution of profit.

Conclusion

The Equity Regulation regulated the requirements for the inclusion of debt securities in equity calculation. The Communiqué further regulates debt securities’ write offs, value decreases, and shares conversions.