* Prices new shares at 0.43 euros each
* Price represents 32 percent discount to TERP
* To sell nine new shares for every 25 already held
* Rights issue, governance changes sought by Bank of Italy (Updates with terms of share issue)
By Valentina Za
MILAN, April 30 Banca Popolare di Milano (BPM) said it would price new shares in a capital increase to raise up to 500 million euros ($693.3 million) at 0.43 euros per share, as it moves to comply with a regulatory request to boost capital.
Executives of BPM met on Wednesday to agree on the pricing of the issue, which was forced on the lender by the Bank of Italy as part of a broader overhaul including a key governance reform that was blocked by shareholders this month.
The price for the new shares represents a 31.8 percent discount to the share price based on the theoretical ex-rights price (TERP).
The bank said it would sell up to 1.162 billion new ordinary shares or nine new ones for every 25 already held.
Until it complies with the central bank's requests, BPM must apply larger risk-weights to calculate the closely-watched capital ratios that measure its financial strength, forcing it to set aside more capital.
Analysts say that without the penalisation, BPM would be more capital efficient, boosting its chances of passing the asset review and stress tests the European Central Bank (ECB) is carrying out before taking on oversight of euro zone lenders in November.
BPM is one of 15 Italian banks under scrutiny by the ECB.
BPM shareholders previously unexpectedly rejected a watered-down governance reform aimed at giving institutional investors a greater say.
Bolder attempts to turn the co-operative bank into a joint-stock company had already failed, prompting Italian businessman Andrea Bonomi, who had spearheaded the changes after becoming the top investor in the bank, to sell his entire stake in January.
The Bank of Italy has repeatedly told co-operative lenders, whose shareholders have one vote each regardless of the size of their stake, to reform and become more attractive for investors.
Italian banks are tapping markets to strengthen their balance sheets ahead of the ECB's review. Eight of those under scrutiny are raising more than 10 billion euros in total.
BPM is set to launch its share issue on Monday and will give shareholders until May 23 to exercise the right to buy the new shares. By 1218 GMT shares in the bank rose 1.3 percent at 0.7315 euros, outperforming 0.9 percent fall in Italy's banking stocks index.
The bank has said the cash call, involving the sale of new stock to existing investors, would bring its best-quality Common Equity Tier 1 capital ratio to around 8.4 percent of assets, from 7.1 percent at end-2013. That would be only slightly above an 8 percent threshold the ECB has set for banks in the review.
BPM has said this key measure of a bank's ability to absorb potential losses would rise by a further 1.8 percentage points once the Bank of Italy allows it to drop the additional risk weighting.
"The full removal ... before October, the deadline by which the results of the asset-quality review and stress tests will be published, would significantly reduce its executions risks (for BPM)," Italian broker Equita said in a note.
($1 = 0.7237 Euros) (Editing by David Holmes and Erica Billingham)