About equity certificates
Norway’s savings banks enjoy a strong position in the market, also compared with their counterparts in other countries. Savings banks’ share (incl. DnB NOR’s) of the deposit market is around 70 per cent. Their share of the retail market is particularly high. Moreover, savings banks enjoy a very strong position among small and medium-sized enterprises. Savings banks engage in all ordinary banking business and can provide the same services as commercial banks.
Savings banks in Norway have traditionally been organised as independent foundations whose equity essentially consisted of previous years’ retained profits plus the ownerless capital. In 1987 the Savings Banks Act was amended to enable savings banks to bring in capital from the market by issuing primary capital certificates, termed equity certificates as from 1 July 2009. The capital brought in by this means counts as tier 1 capital under the provisions governing capital adequacy. Equity certificates have been issued by 26 savings banks.
New term - new body of rules
Act of 19 June 2009 No. 46 on changes in the Financial Institutions Act and certain other statutes (relating to forms of capital and organisation in the savings bank sector etc) came into force on 1 July 2009. On the same date, new regulations on equity certificates came into effect while the old regulations on primary capital certificates were revoked.
The new provisions provide a modernised body of rules for savings banks’ primary capital certificates, now known as equity certificates, and the appurtenant equity certificate capital. Key factors hitherto governed under the regulations on primary capital certificates have now been transposed to the Financial Institutions Act, Chapter 2(b) entitled ‘Capital. Equity Certificates’, accompanied by the enactment of new, shorter regulations on the new equity capital instrument covering aspects such as election rules etc.
Introduction of equity certificates
The new law provisions and regulations bring several key changes to the savings banks’ equity capital instrument, while ensuring that savings banks retain their institutional identity.
Amendments to the legislation governing equity certificates are mainly designed to eliminate the dilution effect by paving the way for a relatively equal distribution of cash dividends and gifts such that the ‘owner fraction’ (defined as the ratio of equity certificate capital to total equity capital) can remain constant. The Act states: “Upon allocation of cash dividends and gifts, the institution should take care that the ratio between the ownerless capital and the equity certificate capital does not change significantly."
Removal of the dilution effect is facilitated by allowing the banks greater scope to distribute gifts. Distributing gifts and cash dividends in excess of 30 per cent of net profit must be reported to Kredittilsynet while a figure in excess of 60 per cent requires authorisation from Kredittilsynet whose assessment will in each case rest on considerations of financial soundness. Hence, a bank can without authorisation distribute up to 60 per cent of its net profit as gifts and cash dividends, with 40 per cent going to the dividend equalisation fund or gift fund. Although the industry was not in favour of quantitative limits on the distribution of gifts, the limits set should normally allow savings banks sufficient scope for action.
Equity certificate capital and ownerless capital, equivalent to two “share classes", will accordingly be treated on a par with share classes in a limited liability company. This will be of consequence for dividend policy. A larger portion of the equity certificate holders’ share of the net profit will be transferred to the equalisation fund.
Like the earlier primary capital certificates, the equity certificates now in use confer limited influence in the committee of representatives: a minimum of 20 per cent and a maximum of 40 per cent of the representatives are elected by the equity certificate holders. However, equity certificate holders can achieve greater influence under the new legislation. The committee of representatives can by changes to statues decide that a two-thirds majority of the representatives elected by the equity certificate holders is required to pass certain resolutions particularly affecting the holders. This applies inter alia to any reduction or increase of equity certificate capital and to any resolution in favour of a merger or conversion to limited liability status. The banks, at all events those that are keen to attract professional investors, must be expected to take this opportunity to strengthen equity certificate holders’ influence.
A drawback for equity certificate holders is that equity certificate premiums will from now on be distributed between the holders’ equity certificate premium reserve and the newly established compensation fund that forms part of the ownerless capital. Further, a provision has been incorporated that entitles Kredittilsynet in special cases to refuse to approve issues where the issue price is considered to diverge clearly from fair value.
Crucial to the position of the equity certificate is the retention of the earlier ranking order of creditors in a deficit situation or in the event of winding up. The newly established compensation fund has however been given the same seniority as the equity certificate premium reserve. These funds will be senior to the equalisation fund and ownerless capital, but junior to equity certificates.
Should a savings bank be wound up, the equity certificate holders will be entitled to disbursement of the equity certificate capital and the premium reserve provided all creditors of bank have received full payment. Where not all creditors receive full payment, the ranking order comes into play.
Restrictions on major holdings
The same rules governing significant holdings apply to equity certificates as to shares. See the Financial Institutions Act section 2(b)-17.
New term - new body of rules
Act of 19 June 2009 No. 46 on changes in the Financial Institutions Act and certain other statutes (relating to forms of capital and organisation in the savings bank sector etc) came into force on 1 July 2009. On the same date, new regulations on equity certificates came into effect while the old regulations on primary capital certificates were revoked.
The new provisions provide a modernised body of rules for savings banks’ primary capital certificates, now known as equity certificates, and the appurtenant equity certificate capital. Key factors hitherto governed under the regulations on primary capital certificates have now been transposed to the Financial Institutions Act, Chapter 2(b) entitled ‘Capital. Equity Certificates’, accompanied by the enactment of new, shorter regulations on the new equity capital instrument covering aspects such as election rules etc.
Introduction of equity certificates
The new law provisions and regulations bring several key changes to the savings banks’ equity capital instrument, while ensuring that savings banks retain their institutional identity.
Amendments to the legislation governing equity certificates are mainly designed to eliminate the dilution effect by paving the way for a relatively equal distribution of cash dividends and gifts such that the ‘owner fraction’ (defined as the ratio of equity certificate capital to total equity capital) can remain constant. The Act states: “Upon allocation of cash dividends and gifts, the institution should take care that the ratio between the ownerless capital and the equity certificate capital does not change significantly."
Removal of the dilution effect is facilitated by allowing the banks greater scope to distribute gifts. Distributing gifts and cash dividends in excess of 30 per cent of net profit must be reported to Kredittilsynet while a figure in excess of 60 per cent requires authorisation from Kredittilsynet whose assessment will in each case rest on considerations of financial soundness. Hence, a bank can without authorisation distribute up to 60 per cent of its net profit as gifts and cash dividends, with 40 per cent going to the dividend equalisation fund or gift fund. Although the industry was not in favour of quantitative limits on the distribution of gifts, the limits set should normally allow savings banks sufficient scope for action.
Equity certificate capital and ownerless capital, equivalent to two “share classes", will accordingly be treated on a par with share classes in a limited liability company. This will be of consequence for dividend policy. A larger portion of the equity certificate holders’ share of the net profit will be transferred to the equalisation fund.
Like the earlier primary capital certificates, the equity certificates now in use confer limited influence in the committee of representatives: a minimum of 20 per cent and a maximum of 40 per cent of the representatives are elected by the equity certificate holders. However, equity certificate holders can achieve greater influence under the new legislation. The committee of representatives can by changes to statues decide that a two-thirds majority of the representatives elected by the equity certificate holders is required to pass certain resolutions particularly affecting the holders. This applies inter alia to any reduction or increase of equity certificate capital and to any resolution in favour of a merger or conversion to limited liability status. The banks, at all events those that are keen to attract professional investors, must be expected to take this opportunity to strengthen equity certificate holders’ influence.
A drawback for equity certificate holders is that equity certificate premiums will from now on be distributed between the holders’ equity certificate premium reserve and the newly established compensation fund that forms part of the ownerless capital. Further, a provision has been incorporated that entitles Kredittilsynet in special cases to refuse to approve issues where the issue price is considered to diverge clearly from fair value.
Crucial to the position of the equity certificate is the retention of the earlier ranking order of creditors in a deficit situation or in the event of winding up. The newly established compensation fund has however been given the same seniority as the equity certificate premium reserve. These funds will be senior to the equalisation fund and ownerless capital, but junior to equity certificates.
Should a savings bank be wound up, the equity certificate holders will be entitled to disbursement of the equity certificate capital and the premium reserve provided all creditors of bank have received full payment. Where not all creditors receive full payment, the ranking order comes into play.
Restrictions on major holdings
The same rules governing significant holdings apply to equity certificates as to shares. See the Financial Institutions Act section 2(b)-17.
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