Banks get guidelines on issuing preferred shares

The China Securities Regulatory Commission and China Banking Regulatory Commission have released a guideline on commercial banks issuing preferred shares to replenish core capital, the CSRC said on Friday.

"It is good for commercial banks to broaden their channels of replenishing capital, and it will reduce stress on the A-share market to protect the interests of investors," said CSRC spokesman Deng Ge,

To replenish capital, Chinese commercial banks have depended on retained earnings, and issuing common shares and a few subordinated bonds.

"The guideline set up the application requirements and issuing procedures with which commercial banks can issue preferred shares, and also confirmed the qualified standards of preferred shares as a core capital instrument," Deng said.

The guideline said commercial banks can cancel the dividend payment in any case, which will not be regarded as default events.

"But commercial banks should think carefully about shareholders' interests before canceling the payments," said an official at CSRC who declined to be named.

Commercial banks can transform preferred shares to common shares only when a trigger event occurs.

The guideline said commercial banks should conform with the regulations of the State Council, CSRC and CBRC, as well as the requirements on using the capital replenishing instrument of the CBRC.

Commercial banks should first apply to the banking regulatory commission with application materials including issuing plan, company constitution, resolution of shareholders' meeting and annual financial reports from the past three years.

After commercial banks receive approval from the CBRC, they can apply to securities regulatory commission.

Deng said that the guidelines have streamlined the administrative licensing process for issuing preferred shares and have strengthened the requirements on information disclosure.

Last month, the securities commission released rules for a pilot program allowing companies to issue preferred shares.

Three types of listed companies can issue the shares: Shanghai Stock Exchange 50 index members (the largest by market capitalization); companies planning to acquire other listed companies by issuing preferred shares for payment; and companies that are buying back common stock and that plan to decrease their registered capital by issuing preferred shares as payment.

Other domestically listed companies can conduct private placements of preferred shares through stock exchanges, as long as they comply with Chinese laws and regulations.

Unlisted domestic companies and Chinese firms listed abroad also can apply for private placements of preferred shares to qualified investors with the entity number in one issue limited to 200 or fewer.

Preferred shares pay fixed dividends and enjoy priority over common stock in the event of bankruptcy. They typically do not trade on the open market, carry no voting rights and do not dilute net profits attributable to shareholders.