12.5.3.3 Capital raising exercise

When shareholders participate in a capital raising exercise, then they are not diluted (or less diluted – depending on the percentage of participation). For instance, in the case of the Lithuanian Central Credit Union (LCCU), there was no mention of dilution, because the member credit unions contributed to the capital increase of LCCU.1 Participating in a capital raising exercise constitutes burden-sharing by shareholders. In one of its decisions, the Commission noted that “as the shareholders have injected capital into the bank pro rata to their respective shareholding, the burdens are at least equitably distributed among the groups of shareholders”.2

The fact that shareholders are diluted and the fact that shareholders participate in the capital raising exercise are counterparts: either the shareholders participate in the capital raising exercise by purchasing newly issued share pro rate to their current stake, or they do not participate in the capital raising exercise, resulting in a dilution of their shareholding.3

The fact that shareholders participate in the capital raising exercise is relevant as regards burden-sharing, while the fact that the bank conducted a capital raising exercise is also relevant from another perspective: it ensures that the aid amount is limited to the minimum. Indeed, in some decisions, the Commission noted positively that the beneficiary bank had, prior to receiving State aid, conducted a capital raising exercise. For instance, in June 2008, prior to the State support, Royal Bank of Scotland (RBS) conducted a capital raising exercise.4 In December 2008, RBS conducted another capital raising exercise. The State participated in the capital raising exercise, but it only purchased the shares not subscribed by the market. This was noted positively by the Commission, because it ensured that alternative financing could not be found on the market.5

Similarly, in the decision on Banco Comercial Português (BCP), the Commission noted positively that 14% of the capital shortfall was provided by private investors.6 In 2012, BCP not only issued CoCo’s subscribed by the Portuguese State, BCP also issued ordinary shares. These shares were offered to the current shareholders of BCP for subscription through the exercise of their pre-emptive subscription rights.7 The issuance of ordinary shares diminished the State’s recapitalisation to 86% of the identified total capital shortfall.