The new minimum capital requirement for banks - A real challenge
The Bank of Ghana (BoG), on September 11, 2017, announced an upward revision in the minimum paid-up capital for existing banks and new entrants, from GH¢120,000,000 to GH¢400,000,000.
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This represents a 233.33 per cent jump in the minimum capital requirement for banks in Ghana. All existing banks, as well as new entrants that have obtained “approval in principle”, have been given up to the end of December 2018 to comply with the new capital requirement. According to the BoG, this move is to strengthen and modernise the financial sector in a bid to support the government’s vision and transformational agenda.
Despite the good motive behind the capital revision as reflected in the BoG’s announcement, the level of increase to some players in the financial sector seems to be on the high side. Concerns have been raised about the fact some banks will be unable to meet this high capital requirement within the timeline given. To many stakeholders, the blanket treatment being meted out to all banks irrespective of their size has the likelihood of eliminating small banks with good growth prospects.
The new requirement has, thus, raised anxiety amongst banks, particularly those that are yet to have the requisite financial position to meet the revised minimum paid-up capital.
In any case, it is apparently clear that the BoG will most unlikely depart from its decision. Banks, therefore, have no choice than to put in place necessary measures to comply with the BoG’s directives.
It is expected that compliance with the new capital requirement will restore market confidence while granting protection to customers.
Implications of the new requirement under the Companies Act, 1963 (Act 179)
The BoG has specifically prescribed the methods for meeting the new minimum capital requirement namely:
• Fresh capital injection;
• Capitalisation of income surplus; and
• A combination of fresh capital injection and capitalisation of income surplus.
The question that may keep lingering on the minds of stakeholders is, what do these methods mean? The prescriptions of the BoG are discussed within the framework of the Companies Act, 1963 (Act 179) (“the Companies Act”) as follows:
Fresh capital injection
Fresh capital injection as prescribed herein can be achieved by the issuance of new shares to existing shareholders or new investors or both.
In order to inject fresh capital in this way, section 202(1)(b) of the Companies Act needs to be complied with. By this provision, new or unissued shares would have to be first offered to existing shareholders in proportion to their existing shareholdings to allow them to exercise their pre-emptive rights.
All or some shareholders may equally want to waive their pre-emptive rights in respect of the shares offered to them. In the event that shareholders decline the offer of shares made to them, or waive their pre-emptive rights, as the case may be, the directors may dispose of the shares in any manner as they deem fit. In this case, the directors can offer the shares to new investors.
Capitalisation of Income Surplus
In pursuance of sections 66(1)(c) and 74(1) of the Companies Act, capitalisation of income surplus simply involves transfer of amounts from income surplus account to stated capital with or without the issuance of shares to shareholders. Where shares are to be issued to shareholders in pursuance of section 74(1) of the Companies Act, the directors have to issue those shares to existing shareholders in proportion to their existing holdings. This procedure, as prescribed by the Companies Act, ensures that no interest of any existing shareholder is diluted as a result of the issue of additional shares.
Section 74(1) particularly provides for transfer from “surplus” for purposes of capitalisation, and according to Professor Gower, this provision connotes transfer from any surplus.
The BoG is, however, specific on capitalisation of “income surplus”, meaning any unrealised appreciation in the value of assets of a bank should be disregarded.
With this method, the challenge is whether banks have the level of income surplus required to comply with the new capital requirement. Shareholders would also be concerned about the fact that earnings that should be reserved for distribution by way of dividend would have to be applied in increasing the stated capital of their banks in line with the new requirement.
It is important to note that in pursuance of section 71 (1)(b), dividend can only be paid to shareholders out of income surplus, and this is what banks have to temper with to meet the new capital requirement. This calls for a real sacrifice in these times.
A combination of fresh capital injection and capitalisation of income surplus
In this case, banks would have to apply a combination of the methods in paragraphs (i) and (ii) as discussed above.
Possible reasons for a combination of fresh capital injection and capitalisation of income surplus may include but not limited to the following:
• The application of only one method may not achieve the required additional capital target;
• The need to minimise the dilution of existing shareholdings, particularly if fresh injection is largely achieved through the issuance of new shares to new investors; and
• To reserve some income surplus for payment of dividend to shareholders despite the obligation to capitalise income surplus.
Impact of directive on shareholders
Given the level of upward revision of capital by the BoG, shareholders of banks may be impacted significantly. They would, however, have to sacrifice in order to prevent their banks from going out of business.
Where a bank is not able to raise the additional capital from its existing shareholders, and does not also have the required level of income surplus for capitalisation, the only option left is for the bank to bring on board new investors. The effect of this is that existing shareholdings may be diluted, resulting in some shareholders losing their majority position. Losing a majority position may imply losing a number of board positions or losing voting power, hence losing influence in decision making.
In the event of capitalisation of income surplus, particularly where the procedure does not also involve the issuance of bonus shares, a bank may be left with little or no income surplus for distribution by way of dividend. Shareholders would, therefore, have to stay without dividend distribution for a while. Banks in the circumstances can minimise the impact of capitalisation on shareholders by issuing bonus shares to them, which is a form of deemed dividend.
In pursuance of the BoG’s announcement, non-compliance with the new minimum capital shall be dealt with in accordance with section 33 of the Banks and Specialised Deposit-Taking Institutions Act, 2016 (Act 930). In essence, this provision makes non-complying banks liable to pay a penalty for each day that the default continues.
Conclusion
The new capital requirement undoubtedly poses a great challenge to the survival of banks. By now, they should have some idea as to whether or not they will remain in business by the end of December 2018. For those that can put in place survival measures, it is important to note that time is really of the essence and they should by now have initiated some processes of compliance.
These are really hard times for banks and shareholders may have to sacrifice in terms of foregoing dividend for a while, as well as allowing their shareholdings to be diluted if need be, in the interest of their banks. — GB
The writer is the Executive Director of Flex Corporate Services Limited, an entity that provides the following services in a wide range of industries:
Email: [email protected]