Royal Bank of Scotland (RBS) may receive compensation in the form of cash and additional shares should its US$1.6 billion investment in Bank of China (BOC) suffer due to a deterioration in the state lender's finances. However, reports that BOC offered unprecedented guarantees to insure the British bank against a raft of business risks 'considerably exaggerated' the position, according to well-placed sources close to mainland banks. The reports were overstated in order to assuage RBS investor concerns about its exposure while the 'misconception' could prejudice other similar negotiations and also send a negative message about the strength of the partnership. The sources told the South China Morning Post that under the agreement RBS would receive compensation over a three-year period, until 2007, should BOC's year-end per share net asset value fall below the level at which it closed last year. Net asset value was chosen as a benchmark to defend against a sharp increase in BOC's non-performing loans, requiring a dramatic rise in its loan-loss provisions. Protection would also be triggered should any future joint ventures between the banks, potentially in the credit-card sector, perform poorly. BOC's inability to sell shares for more than what the RBS consortium paid during a public stock offering or future placements would also trigger safeguards. After 18 months of negotiations, RBS last week announced it was leading a consortium including the Li Ka-shing Foundation and Merrill Lynch to buy 10 per cent of BOC for US$3.1 billion. RBS is taking a 5 per cent stake, having backtracked from taking a larger interest. RBS chief executive Sir Fred Goodwin said in announcing the deal last week: 'We saw those [China's opaque banking system] risks and we have been able to obtain warranties and other protections from the vendor.' Sources said the safeguards obtained were highly unlikely to be invoked. They said elements of the safeguards were similar to those granted by Bank of Communications to HSBC Holdings and by China Construction Bank to Bank of America Corp, both of which made much larger investments in the respective state lenders. 'I don't think anyone expects to see these protections to be triggered,' said a banker. 'I don't think anyone wants them to be triggered. It's just an additional comfort.'