China’s top banking and insurance regulator has issued the draft version of new rules that seek to rein in the excesses of major shareholders in domestic financial institutions.
On 17 June the China Banking and Insurance Regulatory Commission (CBIRC) issued the draft version of the “CBIRC Major Shareholder Conduct Administrative Measures (Trial)” (银行保险机构大股东行为监管办法（试行）).
The Measures have the goal of “improving corporate governance at banking and insurance institutions, strengthening the regulation of shareholder equity, and effectively preventing financial risk.”
The Measures also “strictly standardise and restrain the conduct of major shareholders,” banning them from interfering in the daily operations of banks and insurers, entrusting others or accepting the entrustment of others in participating in shareholders’ assemblies, or using their equity to provide guarantees for the debt of non-affiliates.
Under the Measures a “major shareholder” (大股东) in a bank or insurer is defined as a party that satisfies any of the following conditions:
- Holds over 15% of equity in institutions including state-controlled large-scale commercial banks, national joint-stock commercial banks, foreign invested legal person banks, private banks, insurance institutions, financial asset management companies, financial leasing companies, consumer finance companies or automobile finance companies.
- Holds over 10% of equity in institutions including municipal commercial banks and rural village commercial banks.
- Actually holds the largest amount of equity in a banking or insurance institution (includes shareholders with identical share holdings).
- Nominates two or more directors or supervisors.
- Is believed by the board of directors of banks or insurers to exercise a controlling influence over operations and management.
- Other situations outlined by CBIRC or its agencies.
The Measures stipulate that major shareholders should use their own lawfully sourced funds to invest in the equity of banks and insurers, and are not permitted to use “entrusted funds or debt funds” to invest in equity.
Major shareholders will be required to clearly disclose their own equity structure, including actual controllers, final beneficiaries, as well as affiliate relations with other shareholders.
Where major shareholders pledge over 50% of their equity holdings in banks or insurers, such shareholders and their nominated directors are not permitted to exercising voting rights at shareholders’ assemblies or board meetings.
The Measures outline strict curbs on the conduct of major shareholder, clearly prohibiting them from “inappropriately interfering in the regular operation of banking and insurance institutions,” as well as “using the name of licensed institutions to engage in inappropriate advertising, or using equity to provide guarantees for the debt of non-affiliates.”
Major shareholders are permitted to appoint agents to participate in shareholders’ assemblies, but such agents cannot be people aside from their own entities and affiliates, and nor are major shareholders permitted to participate in shareholders’ meetings on behalf of non-affiliates.
With regard to profit allocation, major shareholders are required to support banks and insurers in adjusting their profit allocation polices based on operating and risk conditions, as well as capital supplementation plans and the risk environment, in order to “effectively balance cash allocations and capital supplementation.”
Under any one of the following circumstances major shareholders in banks and insurers should support reductions or suspension of dividend payments:
- Capital adequacy ratios fail to satisfy regulatory requirements, or solvency levels do not reach targets.
- Corporate governance assessment results are less than C-grade, or regulatory assessments are less than grade 3.
- Loan loss provisions are below regulatory requirements or the non-performing loan ratio is relatively high.
- Banks and insurers are subject to major risk incidents or major legal or regulatory infractions.
- Other circumstances where CBIRC and its agencies believe that dividends should not be paid.