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11 April, 2018
Since late 2017, the China banking regulatory authority (“Banking Authority”) has been significantly strengthening its supervision and regulation on the equities of commercial banks. On November 16, 2017, the China Banking Regulatory Commission (“CBRC”) released the Interim Measures for the Equity Management of Commercial Banks (Consultation Paper) (“Consultation Paper”), and solicited public comments for a period of one month. On January 5, 2018, the CBRC issued its Order No.1 of 2018, the Interim Measures for the Equity Management of Commercial Banks (“Measures”). The Measures was effective upon its promulgation.
Two months after the promulgation of the Measures, the General Office of the CBRC, on March 9, 2018, further released the Circular of the General Office of the CBRC on Relevant Work for Implementation of the Measures (“Circular for Implementation Work”) and the Circular of the General Office of the CBRC on Regulation of Reporting by the Shareholders of Commercial Banks (“Circular for Shareholders Reporting”, collectively, “Ancillary Documents”).
It is our observation that the Banking Authority has rapidly established a relatively sophisticated regulatory framework for the equity management of commercial banks by issuing the Consultation Paper, the Measures and the Ancillary Documents, and the regulatory mindset of “look-through” and “openness and transparency” for the equity management revealed thereunder will certainly have a profound impact on the banking industry and even the whole financial industry.
1. BACKGROUND
Prior to the release of the Measures and the Ancillary Documents, the equity management of commercial banks, instead of being stipulated systematically in one single regulation, is mainly governed by the Implementing Measures of the CBRC for Administrative Licensing for Chinese-funded Commercial Banks, the Implementing Measures of the CBRC for Administrative Licensing for Foreign-funded Commercial Banks, the Implementing Measures of the CBRC for Administrative Licensing for Small-to-Medium-sized Rural Financial Institutions, the Administrative Measures for the Equity Investment in Chinese-funded Financial Institutions by Foreign Financial Institutions, the Circular of the General Office of the CBRC on Intensifying Qualification Reviews of the Major Shareholders of Small-to-Medium-sized Commercial Banks and the Administrative Measures for Related-party Transactions between Commercial Banks and Their Insiders or Shareholders .
Along with the increasing involvement of commercial banks in domestic and overseas capital markets in the past few years, especially concerning the strong interest of “private capitals” in investing in commercial banks, certain problems or even “chaos” were seen as arising from the equity management of commercial banks. Of particular importance, in some other industries, it has been observed many times that investors purchase stocks and become major shareholders of listed companies through high leverage or high cost fundraising, or investors intentionally hide the controllership and beneficiary behind the equity holding by taking advantage of multiple layers of complex structured products, which has caused a negative impact on the transparency and stability of the equity holding of those listed companies. Under such circumstances, it seems to be inevitable for the CBRC, by issuing a special regulation for the equity management of commercial banks, to strengthen its administration on shareholders in terms of the qualification review, information disclosure, negative list management, and related-party transaction management.
2. WHAT SHOULD INVESTORS NOTE WHEN INVESTING IN A COMMERCIAL BANK?
2.1 Explicitly Including Both Domestic and Overseas Securities Markets under Regulation
As provided in the Measures, “where an investor along with its related parties and persons acting in concert, whether individually or jointly, intends to initially or accumulatively hold more than 5% of the total capital or shares of a commercial bank, an application for approval of the investment shall be first filed with the CBRC or its local office. The official reply for the administrative licensing of a proposed holding of more than 5% of the total capital or shares of a commercial bank via domestic or overseas stock markets shall have a term of validity of six months. The specific requirements and procedures for approval are subject to the relevant provisions of the CBRC”; “where an investor along with its related parties and persons acting in concert, holds, whether individually or jointly, more than 1% but less than 5% of the total capital or shares of a commercial bank, a report shall be filed with the CBRC or its local office within ten working days after acquiring such equity interest”.
The Circular for Implementation Work further specifies that “before the implementation of the Measures, any shareholder, individually or jointly, holding more than 5% of the total capital or shares of a commercial bank without approval, shall file an application for qualification with the CBRC or its local offices through such commercial bank within six months from the date of implementation of such Circular.”
The Circular for Shareholders Reporting provides that “a shareholder of a listed commercial bank shall make a report through such commercial bank to the CBRC or its local office within ten working days after the date on which it knows or should have known that it holds, individually or jointly, more than 1% but less than 5% of the total shares of such commercial bank.”
The above provisions under the Measures particularly require an approval from the Banking Authority to be obtained prior to acquiring more than 5% equity interest of a commercial bank via either domestic or overseas stock markets, and the valid term of such approval shall be six months, which expressly governs an acquisition through exchange market. The full text of Measures does not distinguish domestic and overseas investors, same as domestic investors, overseas investors shall comply with all relevant requirements of the Measures and the Ancillary Documents, which means the H share market shall not be an exception to such regulation.
2.2 Restricting Holding Shares via Financial Product
As provided in the Measures, “a financial product may hold the shares of a listed commercial bank, however, all financial products controlled by the same single investor, the same issuer, or the same manager, or any of their actual controllers, related parties or persons acting in concert, shall not hold the shares in a commercial bank in aggregate more than 5% of the total shares of such commercial bank. A major shareholder of a commercial bank is also prohibited from holding shares in the same commercial bank via a financial product issued, managed or otherwise controlled by it.”
Investors should be mindful on the two points of the above provisions: (i) shares acquired by all financial products under the same control shall not exceed 5% of the total shares of a commercial bank, and (ii) the major shareholders of a commercial bank are not allowed to acquire shares in the same commercial bank through financial products. The Circular for Implementation Work further specifies that for any financial product of which the investment proportion in a commercial bank does not comply with the above requirements before the implementation of the Measures, rectifications shall, in principle, be completed within one year from the implementation of the Measures.
In light of the above provisions, it would be unrealistic for investors to acquire or control a commercial bank through highly leverage financial products.
2.3 Intensifying the Obligations and Responsibilities of Major Shareholders
The Measures define the major shareholders as “those who hold more than 5% of the shares or voting rights of a commercial bank or hold less than 5% of its total capital or shares but exert significant influence on its operation and management. The “significant influence” includes, without limitation, assigning directors, supervisors or senior officers to a commercial bank, affecting the financial and operational management decision making of a commercial bank through agreement or otherwise, and other situations identified by the CBRC or its local offices. Investors are particularly advised to notice that even a shareholder holds less than 5% of the total shares of a commercial bank, it will be deemed as a major shareholder if it assigns a director, supervisor or senior officer thereto.
The Banking Authority focuses the supervision and regulation on the major shareholders of commercial banks, therefore proposes additional obligations and responsibilities thereon, which mainly include: (i) each major shareholder to commit in writing that it will abide by laws and regulations, regulatory provisions and articles of association and to provide a statement on its purpose of equity investment in the commercial bank, (ii) each major shareholder to provide a statement to the commercial bank and the Banking Authority on its equity structure (layer by layer), actual controller and ultimate beneficiary, as well as any other affiliated or acting-in-concert relationship reached with other shareholders, (iii) the number of commercial banks that a major shareholder can invest in will be restricted, (iv) a negative list for the conducts of the major shareholders will be proposed, (v) each major shareholder being prohibited from transferring any of the shares acquired by it within 5 years upon the date of acquisition, unless otherwise approved by the CBRC, (vi) each major shareholder being prohibited from intervening in the operational decision making and management of the commercial bank, and (vii) each major shareholder to take responsibility for capital replenishment, that is, according to the requirement of the CBRC, to commit in writing to replenish capital to the commercial bank when necessary, and to report its capacity for capital replenishment through such commercial bank to the CBRC or its local office per annum.
2.4 Expanding the Scope of Requirement on “Liang Can Or Yi Kong ”
As provided in the Measures, “the same investor and its related parties and persons acting in concert may not invest in more than two commercial banks as a major shareholder or control more than one commercial bank”.
The above provision is so called “Liang Can or Yi Kong” (“Rule”). This provision was first introduced in the Circular of the General Office of the CBRC on Intensifying Qualification Reviews of the Major Shareholders of Small-to-Medium-sized Commercial Banks, and the original expression is that “the same shareholder shall not invest in more than two financial institutions in banking industry of the same nature, and shall invest in (or keep) only one such institution if taking a controlling stake.” Compared with the original provision, the Rule under the Measures is more definite in the following three points: first, only the major shareholders investing in commercial banks will be restricted by the Rule, rather than the minor shareholders (including those who hold a small amount of bank stocks through the exchange market); second, all commercial banks invested by the major shareholders will be restricted by the Rule, rather than only banks “of the same nature”; and third, exceptions are specified, i.e. investors or banking institutions that are authorized by the State Council to hold the shares in commercial banks, entities investing in commercial banks as otherwise permitted by laws and regulations, and investors that are approved by the CBRC to merge or reorganize the high-risk commercial banks.
2.5 Shareholders’ Obligation to Report
According the relevant provisions under the Measures, the obligation to report of shareholders of commercial banks are classified into the following two aspects:
(i)Post-acquisition report to the Banking Authority of the shareholding status by the shareholders holding more than 1% but less than 5% of shares. As provided in the Measures, “where an investor along with its related parties and persons acting in concert, holds, whether individually or jointly, more than 1% but less than 5% of the total capital or shares of a commercial bank, a report shall be filed with the CBRC or its local office within ten working days of acquiring the equity interest.”
The Circular for Shareholders Reporting further specifies that “where a shareholder of a commercial bank along with its related parties and persons acting in concert, holds, whether individually or jointly, more than 1% but less than 5% of the total capital or shares of such commercial bank, a report shall be made through such commercial bank to the CBRC or its local office within ten working days of acquiring the equity interest. A shareholder of a listed commercial bank shall make a report through such commercial bank to the CBRC or its local office within ten working days after the date on which it knows or should have known that it holds, whether individually or jointly, more than 1% but less than 5% of the total shares of such commercial bank.”
(ii)A major shareholder shall report to the commercial bank on a timely, accurate and complete basis the following information: (1) its own operating condition, financial information and equity holding structure; (2) its source of funds invested in the commercial bank; (3) the information about its controlling shareholder, actual controller, related party, person acting in concert, ultimate beneficiary and any change thereof; (4) any attachment measures in litigation or enforcement against the equity interest in the commercial bank held by it; (5) pledge or discharge of pledge attached to the equity interest in the commercial bank held by it; (6) change in its name; (7) its merger or spin-off; (8) any order to suspend its business, or takeover or revocation measures taken on it, or its entry into dissolution, bankruptcy or liquidation proceedings; and (9) any other circumstances that may change the conditions of its shareholder qualification or result in changes to its equity holding in the commercial bank.
3. WHAT COMMERCIAL BANKS SHOULD FOCUS ON?
3.1 Identifying Related Party and Related-party Transaction
As provided in the Measures, “a commercial bank shall, by following the look-through principle, regard its major shareholders and their controlling shareholders, actual controllers, (their) related parties, persons acting in concert and ultimate beneficiaries as its own related parties for the purpose of management (of related-party transaction)”. Comparing with the Administrative Measures for Related-party Transactions between Commercial Banks and Their Insiders or Shareholders, the Measures identify the controlling shareholders, actual controllers, related parties, persons acting in concert and ultimate beneficiaries of the major shareholders of a commercial bank as the related parties of the commercial bank for the purpose of management of related-party transaction. The “related party” hereunder is determined according to accounting standards, therefore includes any subsidiary of a major shareholder.
The Measures first propose the concept of “ultimate beneficiaries” of major shareholders, however, it does not further define such concept. As a result, it remains to be seen how the Banking Authority will clarify the criteria of determination in practice.
Since the above provisions would have significant impact on commercial banks’ identification of related parties, we suggest commercial banks to, as early as possible, commence the relevant work on the identification of related parties and fully communicate with their major shareholders, so as to ensure the disclosure of related parties to be fully in compliance with the relevant requirements.
In terms of the management of related-party transaction, the proportions of the credit facility granted to a single related party and group related party under the Measures, as comparing with the Administrative Measures for Related-party Transactions between Commercial Banks and Their Insiders or Shareholders, are not substantially changed. However, the scope of “credit facility” has been amended to “include loans (including trade financing), bill acceptance and discounts, overdrafts, bond investments, investments by specific-purpose vehicles, issuances of letters of credit, factoring, guarantees, loan commitments, and other services whose credit risks are substantially borne by a commercial bank or wealth management products issued by a commercial bank, wherein the final debtor shall be identified by the commercial bank under the look-through principle”, which is relatively broader.
3.2 Periodical Reporting to CBRC
The Measures require that a commercial bank shall proactively intensify its management of equity related matters, improve its corporate governance, and be responsible for the application for administrative approval with regard to equity related matter, the report of shareholder information and related matters, the submission of materials and other work. While the major shareholders are obligated to report information on a timely, accurate and complete basis, the Measures also impose upon a commercial bank an obligation to proactively verify the shareholder qualification, hold the shareholders’ information (not limiting to the major shareholders), and judge the influence of its shareholders on its operation and management, in order to report or disclose relevant information according to laws on a timely, accurate and complete basis. In addition, the Measures require that “the board of directors of a commercial bank shall evaluate, on an annual basis, major shareholders in terms of its qualification, its performance of commitments, implementation of the relevant terms of the commercial bank's articles of association and related agreements, compliance with laws, regulations and regulatory requirements, and timely submit the evaluation report to the CBRC or its local office”.
Moreover, regarding the time limit of initial information reporting, the Circular for Implementation Work requires that a commercial bank shall, within three months from the date of the implementation of the Measures (i.e., April 5, 2018), submit the information of its major shareholders and their controlling shareholders, (their) actual controllers, related parties, persons acting in concert and ultimate beneficiaries to the Banking Authority.
3.3Terms Related to Equity Management Mandatorily Required
As provided in the Measures, “a commercial bank shall incorporate such terms like the applicable regulatory requirements on shareholder management, as well as the shareholders' rights and obligations into its articles of association, among which, the following shall be stipulated: (1) a shareholder shall comply with the laws, regulations and regulatory provisions; (2) a major shareholder shall replenish the capital of the commercial bank where necessary; (3) a shareholder who shall be approved, but has not been approved by the regulatory authority or has not reported to the regulatory authority shall be refrained from exercising the rights to call, vote, nominate, or make a proposal, the rights of disposal, or others at a general meeting; and (4) for a shareholder that makes false statements, abuses shareholders' rights or otherwise harms the interests of the commercial bank, the CBRC or its local office may restrict or prohibit any related-party transaction from being concluded by the commercial bank with such shareholder, limit their holdings in the commercial bank, equity pledge ratio, etc., and restrict their rights to call, vote, nominate, making a proposal, the rights of disposal, or others at a general meeting”.
According to the Circular for Implementation Work, for a commercial bank that needs to amend its articles of association, “in principle, its articles of association shall be amended within one year from the date of the implementation of the Measures”, which means by January 5, 2019 the latest.
4. MORE REGULATORY RULES TO COME OUT
It was reported on March 28, 2018 that the Guiding Opinions on Strengthening Regulation over Non-financial Enterprises’ Investment in Financial Institutions (“Guiding Opinions”) was discussed and approved at the first meeting of the Central Committee for Deepening Overall Reform (the whole text of which has not been publicized yet). We will closely monitor the promulgation of the Guiding Opinions and its implications on the equity management of commercial banks and may share our further observations with our clients.
For further information, please contact:
YU, Yongqiang (YY) , Partner, Jun He
yuyq@junhe.com
