KATHMANDU: Nepal Rastra Bank has directed all banks and financial institutions that have merged or are planning to merge to park surplus funds generated from adjustment of share prices during the consolidation process in the capital fund.
The instruction was issued to prevent banks and financial institutions (BFIs) from distributing the surplus amount in the form of cash dividend or booking them as earning.
Earlier, a commercial bank, which successfully completed a merger process, had listed the surplus amount as earnings in the balance sheet which facilitated it to set off losses incurred in the past. Since then other BFIs that have undergone mergers have also tried to make similar moves, as the law does not have a clear provision on it.
“From now on, the surplus amount generated from swapping of shares during a merger process cannot be extended in the form of cash dividend. It must be deposited in the capital fund,” says an NRB directive issued today.
During the merger process, shares of BFIs are swapped at higher or lower rates depending on their financial strength. The prices are determined after carrying out due diligence audits of BFIs that are consolidating.
For instance, two banks, say, ‘A’ and ‘B’, with equal paid up capital of Rs one billion each may have different financial strengths because of their assets and branch network. So when they initiate a merger process, auditors may determine the share price of the stronger unit, say, ‘A’ at Rs 100 each and that of the weaker one, say, ‘B’ at Rs 65 each.
This means shareholders of bank ‘B’ — whose stocks are priced lower — will only get 0.65 unit of share in the consolidated unit for every share they owned in bank ‘B’. What this implies is that the paid up capital of the consolidated unit will stand at only Rs 1.65 billion, as paid up capital of ‘B’ has dropped down to Rs 650 million following adjustments. However, since ‘B’ had also started off the merger process with Rs one billion paid up capital, Rs 350 million will be left over in the consolidated unit but not in terms of paid up capital.
What the latest NRB directive means is that the surplus generated through share swapping process — like Rs 350 million in the case of banks ‘A’ and ‘B’ — should be parked in the capital fund and not distributed in the form of cash dividends.
“However, this amount can be used to extend bonus shares,” a high-ranking NRB official said.
Source: The Himalayan Times, 14-Nov-2013"
The instruction was issued to prevent banks and financial institutions (BFIs) from distributing the surplus amount in the form of cash dividend or booking them as earning.
Earlier, a commercial bank, which successfully completed a merger process, had listed the surplus amount as earnings in the balance sheet which facilitated it to set off losses incurred in the past. Since then other BFIs that have undergone mergers have also tried to make similar moves, as the law does not have a clear provision on it.
“From now on, the surplus amount generated from swapping of shares during a merger process cannot be extended in the form of cash dividend. It must be deposited in the capital fund,” says an NRB directive issued today.
During the merger process, shares of BFIs are swapped at higher or lower rates depending on their financial strength. The prices are determined after carrying out due diligence audits of BFIs that are consolidating.
For instance, two banks, say, ‘A’ and ‘B’, with equal paid up capital of Rs one billion each may have different financial strengths because of their assets and branch network. So when they initiate a merger process, auditors may determine the share price of the stronger unit, say, ‘A’ at Rs 100 each and that of the weaker one, say, ‘B’ at Rs 65 each.
This means shareholders of bank ‘B’ — whose stocks are priced lower — will only get 0.65 unit of share in the consolidated unit for every share they owned in bank ‘B’. What this implies is that the paid up capital of the consolidated unit will stand at only Rs 1.65 billion, as paid up capital of ‘B’ has dropped down to Rs 650 million following adjustments. However, since ‘B’ had also started off the merger process with Rs one billion paid up capital, Rs 350 million will be left over in the consolidated unit but not in terms of paid up capital.
What the latest NRB directive means is that the surplus generated through share swapping process — like Rs 350 million in the case of banks ‘A’ and ‘B’ — should be parked in the capital fund and not distributed in the form of cash dividends.
“However, this amount can be used to extend bonus shares,” a high-ranking NRB official said.
Source: The Himalayan Times, 14-Nov-2013"
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