* Rules pave way for sale of new hybrid capital instruments
* Banks need funds to meet Basel III capital adequacy
* No equity conversion provisions allowed for publicly
* Strict disclosure requirements
SHANGHAI, April 18 China published detailed
rules on commercial bank issuance of preferred shares on Friday,
paving the way for lenders to begin fundraising designed to
enable them to withstand an expected rise in bad loans.
Chinese 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 don't trade on the open market, carry
no voting rights, and do not dilute net profits attributable to
Stock market investors have been eagerly anticipating their
introduction, hoping they will allow listed companies to raise
necessary funds from stock markets with minimal dilution on
The need for capital among banks is especially acute.
Regulators are implementing Basel III aggressively in order to
fortify banks against losses on bad loans as the economy slows.
China's bad loan ratio hit a two-year high at the end of
2013. Data released this week showed the economy
growing at its slowest pace in 18 months.
China's largest banks must meet a Tier-1 capital adequacy
ratio of 7.9 percent by end-2014 and 9.5 percent by end-2018.
Preferred shares will count as additional Tier-1 capital.
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 (CSRC) Twitter-like micro-blog.
In private placements, however, preferred shares must
include such provisions, which force conversion of preferred
shares when the bank's financial condition deteriorates, the
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.
China's State Council, the country's cabinet, gave the green
light for issuance of preferred shares in China for the first
time last November.
The CSRC followed through by issuing rules for the pilot
programme in March, paving the way for the long-awaited scheme
to be launched. While the CSRC's previous rules
also applied to non-financial companies, the latest ones are
specific to banks.
Friday's guidelines are issued to "help banks to expand
their channels to supplement their capital," a CSRC spokesman
said in a separate statement also published on the regulator's
Preferred shares will also help relieve the pressure on the
Chinese stock market from large-scale rights issues by allowing
banks to issue shares that will not be publicly traded, the
The guidelines also clarified procedures for banks to apply
to issue preferred shares. Banks must first apply to the China
Banking Regulatory Commission (CBRC), then the CSRC.
Banks will also be subject to strict information disclosure
requirements. They will have to disclose any changes in the
scale of their preferred share issuance plans, as well as
changes to the fixed dividend.
In addition to preferred shares, regulators are also
encouraging banks to raise regulatory capital through the sale
of special subordinate bonds -- known as "Basel bonds" -- that
contain provisions allowing them to be written off or converted
to common equity if a bank is in financial distress.
(Reporting by Lu Jianxin and Gabriel Wildau; Editing by