KATHMANDU, July 8: The Securities Board of Nepal (SEBON) has paved the way for banks and financial institutions (BFIs) to issue their Perpetual Non-Cumulative Preference Shares (PNCPS), which is expected to minimize pressure on capital adequacy fund of the entities. Experts say this move will allow BFIs to increase their lending.
Through the ninth amendment to the ‘Securities Issuance and Distribution Directive,’ the SEBON has come up with this provision for the BFIs. Although Nepal Rastra Bank last year permitted the BFIs to float their PNCPS, they were unable to do so due to SEBON’s failure to streamline its law.
Unlike the ordinary type preference shares, the PNCPS do not accumulate unpaid dividends from prior years. Under this type, the fixed dividend is specified at the time of issuance, while the dividend amount remains constant over the time. If a BFI looks for retained earnings rather than paying dividends in a particular year, the holders of the PNCPS cannot claim those missed out dividends in the future.
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According to the SEBON, the PNCPS is considered under Additional Tier I Capital under Basel III, which helps the BFIs meet their capital adequacy requirement. As these shares have lower dividend rates compared to the common equity, it will help BFIs reduce their overall cost of capital fund. Also, as the BFIs in this case can defer dividend payments without penalty, they enjoy more flexibility of preserving cash at the time of difficult situations.
The revised directive however talks about making the BFIs issue the PNCPS only to their institutional shareholders. Individual investors, stockbrokers and mutual funds have been barred from subscription of the PNCPS that can be issued only through the circulation method.
At a time when BFIs have been facing excess liquidity due to inadequate demand for loans along with the central bank’s mandatory threshold of capital adequacy fund, the SEBON’s initiative is expected to ease the BFIs to expand their businesses.
According to bankers, the lending capacity of the BFIs has also been affected as they have been struggling to maintain the mandatory capital adequacy ratio mandated by the NRB. The central bank has asked the BFIs to maintain a minimum of 11.5 percent of their risk weighted assets in the capital adequacy fund.
