In Spain, Saving Banks are subject to the same regulatory treatment as other credit companies, insofar as their operations are concerned. However, as for their configuration, Saving Banks present a number of particularities, such as the obligation to allocate a high percentage of the profits they generate to financing social projects (the reason being their status of not-for-profit organizations) and their regional roots. These justify the existence of differences in their legal framework.
One of these differences is the impossibility of issuing shares to increase their equity, which means Saving Banks have limited possibilities to obtain financing. This limitation of financial resources posed a problem that could limit the possibility of increasing its volume in the future.
In order to address this problem, the Spanish legislator has tried to find different ways to give other financial resources to Saving Banks. The latest response was Law 44/2002, known as the Financial Law, which introduced, apart from a number of measures to lessen the difficulties encountered by Saving Banks when trying to raise financing, measures which allow these entities to increase their volume by, for example, allowing mergers between Saving Banks of different regions.
Among the measures in order to facilitate the financing of Savings Banks, the regulation and modification of the participative quotas (in Spanish terminology, "cuotas participativas") has been particularly relevant.
The regulation of the participative quotas pursued two purposes:
- Mentioned financing effect (i.e. giving to Saving Banks the possibility of increasing their equity).
- An indirect effect, consisting of improving the professionalisation of the management of Saving Banks, as the investors would have the opportunity of evaluating the management of Saving Banks as quoted companies.
Under this scenario, the recently enacted Royal Decree 302/2004 has further developed the legal framework of the participative quotas, specifying their main features, issuing procedure and holder’s rights.
2. Main features.
The participative quotas are considered negotiable instruments, perpetual, nominative, represented through book entries, quoted on a Stock Exchange and with no political rights. They represent part of the equity of the issuing Saving Bank.
It should also be said that the participative quotas are of a hybrid nature. They are equity securities, since their retribution is related to the results obtained by the issuing Saving Bank, but, on the other side, they show characteristics of fixed interest securities, since they do not have political rights.
3. Issue and negotiation
The issuing of participative quotas is decided by the General Meeting, which may be delegated to the Board of Directors for a period not exceeding three years. This delegation will be subject to the conditions established in the issuing agreement adopted by the General Meeting.
The issuing agreement should contain the characteristics of the issuing, including the estimated economic value of the Saving Bank and the issuing premium. With regard to the economic value of the Saving Bank, it should be determined by an independent external professional on the first issue of quotas. From the second issue onwards, the report of an auditor shall only be necessary under certain circumstances.
The issuing agreement can create a holders’ syndicate, to represent and protect the interests of the holders.
The regulation establishes the creation of three funds when issuing participative quotas: (i) Participation Fund, equal to the sum of the face value of the participative quotas issued; (ii) Holder’s Reserves Fund, integrated by part of the profit of the Saving Bank that has not been destined neither to the Stabilization Fund nor effectively distributed to the holders; and (iii) Stabilization fund, whose purpose is to avoid excessive fluctuations in the participative quotas retribution. Its creation is optional.
The regulation of the participative quotas establishes a limit of possession of participative quotas of 5% of the quotas issued.
4. Holders’ rights
As it has been previously commented, participative quotas have no political rights. As a consequence, participative quotas cannot be considered a way of privatising Saving Banks.
In what regards the economic rights, the holder will participate in the profits of the Saving Bank and also in the losses.
As regards the retribution of the quotas, the regulation establishes a maximum and minimum amount to be annually distributed. It also establishes the possibility of authorisation by the Bank of Spain to increase these amounts.
The holders also have a pre-emption right over new quotas.
5. Conclusion
Participative quotas have been introduced as mechanism to solve Saving Banks financing problems. However, by certain sectors the introduction of such mechanism has been criticised considering that the issue of participative quotas could be the first step towards the privatisation of Saving Banks. Time will tell whether the actual Spanish Saving Banks will decide adhering to this new financing system or will choose other ways of financing.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
