Beijing issues detailed rules on banks' sale of preferred shares

PUBLISHED : Saturday, 19 April, 2014, 1:09am
UPDATED : Saturday, 19 April, 2014, 1:09am

The mainland published detailed rules on commercial bank issuance of preferred shares yesterday, paving the way for lenders to begin fundraising designed to enable them to withstand an expected rise in bad loans.

Mainland banks are facing pressure to raise funds after the banking regulator began phasing in stricter capital adequacy requirements last year in line with global rules on bank capital known as Basel III.

Preferred shares are a form of hybrid security with characteristics of debt and equity. They enjoy seniority over common stockholders in the event of bankruptcy, but in other respects they have limited impact on common shareholders. Such shares typically do not trade on the open market, carry no voting rights and do not dilute net profits attributable to shareholders.

In order to protect the interests of ordinary investors, preferred shares issued to the public must not contain provisions that allow preferred shares to be converted to common equity, under the guidelines published on the China Securities Regulatory Commission's Twitter-like microblog.

In private placements, however, preferred shares must include such provisions, which forced conversion of preferred shares when the bank's financial condition deteriorated, the guidelines said. Commercial banks applying to sell preferred shares must already have a core capital adequacy ratio above the minimum standard, according to the guidelines published jointly by the banking and stock regulators.

The State Council gave the green light for issuance of preferred shares on the mainland for the first time in November last year. The CSRC followed through by issuing rules for the pilot programme in March, paving the way for the scheme to be launched. While the commission's previous rules also applied to non-financial companies, the latest ones are specific to banks.

Yesterday's guidelines were issued to "help banks to expand their channels to supplement their capital", a commission spokesman said in a separate statement also published on the regulator's microblog.

The need for capital among banks is especially acute. Regulators are implementing Basel III aggressively to fortify banks against losses on bad loans as the economy slows. The mainland's bad-loan ratio hit a two-year high at the end of last year.