Banks Act, 1990 (Act No. 94 of 1990)RegulationsRegulations relating to BanksChapter II : Financial, Risk-based and other related Returns and Instructions, Directives and Interpretations relating to the completion thereof38. Capital Adequacy, Leverage and TLACCapital Adequacy, Leverage and TLAC - Directives and interpretations for completion of monthly return concerning capital adequacy, leverage and TLAC (Form BA 700)Subregulation (12) Conditions for the issue of instruments or shares of which the proceeds rank as tier 2 capital |
| (12) | Conditions for the issue of instruments or shares of which the proceeds rank as tier 2 capital |
The proceeds of issued instruments or shares contemplated in section 1(1) of the Act that comply with all the conditions specified below shall rank as tier 2 capital:
| (a) | Subject to the provisions of paragraphs (b) and (c) below, in the case of any instrument or share that is subordinated to depositors and general creditors— |
| (i) | the terms and conditions of the instrument shall contain a provision that requires such instrument, at the option of the Registrar, to either be written off or converted into the most subordinated form of equity upon the occurrence of the trigger event specified in writing by the Registrar, unless duly enforceable legislation is in place that— |
| (A) | requires the instrument to be written off upon the occurrence of the aforesaid event; or |
| (B) | otherwise requires the instrument to fully absorb loss before tax payers or ordinary depositors are exposed to loss, |
and the bank or controlling company complies with such further requirements as may be directed by the Registrar in writing.
Provided that—
| (i) | any compensation paid to the instrument holders as a result of the aforesaid write-off shall be paid immediately and in the form of the most subordinated form of equity of the relevant bank or its controlling company, and the bank or controlling company, as the case may be, shall at all times maintain all prior authorisation necessary to immediately issue the relevant number of shares specified in the instrument's terms and conditions should the trigger event occur; |
| (ii) | the issuance of any new shares as a result of the trigger event shall occur prior to any public sector injection of capital so that the capital provided by the public sector shall not be diluted; |
| (iii) | as a minimum, the aforesaid trigger event shall be the earlier of— |
| (aa) | a decision that a write-off, without which the bank or controlling company would become non-viable, is necessary, as determined by the Registrar; or |
| (bb) | the decision to make a public sector injection of capital, or equivalent support, without which the bank or controlling company would have become non-viable, as determined by the Registrar. |
| (ii) | the bank or controlling company, as the case may be, shall obtain the prior written approval of the Registrar before the instrument or share is issued; |
| (iii) | the key features of the relevant instruments or shares shall be duly disclosed in the annual financial statements or other relevant disclosures to the general public; |
| (iv) | the instrument or share— |
| (A) | shall be issued and fully paid; |
| (B) | shall be neither secured nor covered by any guarantee of the issuer or related or associated entity, or be subject to any other arrangement that legally or economically enhances the seniority of the claim; |
| (C) | shall have a minimum original maturity of more than five years, provided that during the fifth year preceding the maturity of the relevant instrument the amount qualifying as tier 2 capital shall be reduced by an amount equal to 20 per cent of the amount so obtained and, annually thereafter, by an amount that in each successive year is increased by 20 per cent of the amount so obtained, as set out in table 1 below: |
Table 1
Years to maturity |
Qualifying amount included in tier 2 capital |
Specified reduction |
5 years or more |
100% |
0% |
4 years and more but less than 5 years |
80% |
20% |
3 years and more but less than 4 years |
60% |
40% |
2 years and more but less than 3 years |
40% |
60% |
1 year and more but less than 2 years |
20% |
80% |
Less than 1 year |
0% |
100% |
[Regulation 38(12)(a)(iv)(C) substituted by regulation 22(qq) of Notice No. 297, GG 40002, dated 20 May 2016]
| (D) | shall not contain any provision for step-up or other incentive to redeem; |
| (E) | shall not have any credit sensitive dividend feature, that is, a dividend or coupon that is periodically reset based in whole or in part on the bank's credit standing or rating; |
| (F) | shall not be held or acquired by the bank or any person related to or associated with the bank over which the bank exercises or may exercise control or significant influence; |
[Regulation 38(12)(iv)(F) substituted by regulation 22(rr) of Notice No. 297, GG 40002, dated 20 May 2016]
| (G) | shall not be funded directly or indirectly by the relevant bank or controlling company; |
| (H) | may be callable at the sole initiative of the issuer only after a minimum period of five years, provided that— |
| (i) | the bank shall obtain the prior written approval of the Registrar before exercising the said call; |
| (ii) | the bank shall not create any expectation that such call will be exercised; |
| (iii) | the bank shall not exercise the call unless the bank— |
| (aa) | concurrently replaces the called instrument with capital of similar or better quality and the replacement of capital is done at conditions that are sustainable for/with the income capacity of the bank; or |
| (bb) | demonstrates to the satisfaction of the Registrar that its capital position shall be well above the relevant specified minimum capital requirements after the call option is exercised; |
| (v) | the investor shall not have any right to accelerate the repayment of future scheduled payments, such as coupon or principal, except in the case of bankruptcy and/or liquidation; |
| (vi) | when the instrument or share is issued by a special purpose vehicle or institution, instead of by an operating entity, that is, an entity established to conduct business with clients with the intention of earning a profit in its own right, or the relevant controlling company in the consolidated group, the proceeds shall be immediately available without limitation to an operating entity or the controlling company in a form that meets or exceeds all the relevant criteria for inclusion in tier 2 capital specified above; |
| (b) | When— |
| (i) | an instrument or share was issued prior to 12 September 2010 and that instrument or share does not comply with the relevant criteria and conditions specified in paragraphs (a)(ii) to (a)(vi) above, which criteria and conditions shall for purposes of these Regulations be referred to as the entry criteria and conditions, the proceeds obtained through the issue of that instrument or share shall be phased out from 1 January 2013 in accordance with the relevant requirements specified in paragraph (c) below; |
| (ii) | an instrument or share was issued on or after 12 September 2010 but before 1 January 2013, and that instrument or share does not comply with the relevant criteria and conditions specified in paragraph (a)(i) above, but the instrument or share meets or complies with all the relevant entry criteria and conditions specified in paragraphs (a)(ii) to (a)(vi), the proceeds obtained through the issue of that instrument or share shall be phased out from 1 January 2013 in accordance with the relevant requirements specified in paragraph (c) below; |
| (iii) | a hybrid-debt instrument issued prior to 12 September 2010 contains a call or step-up or any other incentive to be redeemed— |
| (A) | between 12 September 2010 and 31 December 2012, and the instrument is not called and redeemed during that period, and on or after 1 January 2013 the instrument does not comply with the criteria for inclusion in tier 2 capital specified in this subregulation (14), the proceeds from that instrument shall be fully disqualified for inclusion in the total amount of tier 2 capital from 1 January 2013; |
| (B) | on or after 1 January 2013, and the instrument is not so called and redeemed on that date, and following that date the instrument does not comply with the criteria for inclusion in tier 2 capital specified in this subregulation (14), the proceeds from that instrument shall be fully disqualified for inclusion in the total amount of tier 2 capital from the date that the incentive to redeem was not exercised; |
| (iv) | an instrument or share is issued on or after 1 January 2013, that instrument or share shall comply with all the relevant conditions specified in paragraph (a) above in order for the proceeds obtained through the issue of that instrument or share to qualify as tier 2 capital. |
| (c) | Based on the relevant requirements specified in paragraph (b) above, a bank or controlling company— |
| (i) | shall on 1 January 2013 determine the base amount in respect of all relevant instruments that do not meet or comply with the relevant specified criteria or requirements in paragraph (a), the proceeds of which shall be phased out in accordance with the relevant requirements specified in subparagraph (ii) below; |
| (ii) | shall manage its business in such a manner that during the periods specified in table 4 below, the relevant aggregate amount of the said instruments included in the bank or controlling company's relevant amount of qualifying tier 2 capital shall not exceed the percentage of the base amount specified in table 4 below: |
Table 4
Specified period |
Specified percentage of the relevant base amount |
1 January 2013 to 31 December 2013 |
90 |
1 January 2014 to 31 December 2014 |
80 |
1 January 2015 to 31 December 2015 |
70 |
1 January 2016 to 31 December 2016 |
60 |
1 January 2017 to 31 December 2017 |
50 |
1 January 2018 to 31 December 2018 |
40 |
1 January 2019 to 31 December 2019 |
30 |
1 January 2020 to 31 December 2020 |
20 |
1 January 2021 to 31 December 2021 |
10 |
Provided that from 1 January 2022 only instruments that fully comply with all the criteria and requirements specified in paragraph (a) shall be included in the bank or controlling company's relevant amount of qualifying tier 2 capital.
[Regulation 38(14) renumbered as regulation 38(12) by regulation 22(kk)(ii) of Notice No. 297, GG 40002, dated 20 May 2016]