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FEDERAL RESERVE B A * OF NEW YORK [ Circular No. 10228 1 March 2, 1988 AMENDMENT TO REGULATION K Additional Provisions Regarding International Debt-for-Equity Swaps To All Depository Institutions, and Others Concerned, in the Second Federal Reserve District: The following statement has been issued by the Board of Governors of the Federal Reserve System: The Federal Reserve Board announced that it has further liberalized the provisions of Regulation K to permit investments abroad by U.S. banking organizations through debt-for-equity swaps in private sector nonfinancial companies in heavily indebted developing countries. The amendment is effective February 24, 1988. This action is a follow-up step to the Board’s revision of Regulation K in August 1987 to permit banking organizations, through debt-for-equity swaps, to own up to 100 percent of nonfinancial companies that are acquired from the government of a heavily indebted developing country. The Board’s regulation had already provided banking organizations with considerable flexibility to reduce exposure by selling debt to other investors or to take advantage of debt-for-equity swap programs by exchanging debt obligations for controlling equity interests in companies engaged in financial activi ties or portfolio investments in up to 20 percent of the shares of nonfinancial companies. The Board’s new amendment provides bank holding companies with broad flexibility to make in vestments in up to 40 percent of the shares of any private sector company in a heavily indebted devel oping country. The amendment also substantially lengthens the permissible holding period for invest ments made through debt-for-equity swaps. The key elements of the amendment are: © A U.S. banking organization may invest in up to 40 percent of the shares of a private sector company through a debt-for-equity swap in a heavily indebted country; © The U.S. banking organization that makes an investment in a private sector company under the revised regulation will also be permitted to provide loans or other financing in amounts up to 50 percent of the total loans and extensions of credit to the affiliated company; © The U.S. banking organization may hold the investments made through debt-for-equity swaps for two years beyond the end of the period during which full repatriation of the investment is restricted by the debtor country, up to a maximum of 15 years; and, (OVER) o Investments may be made under revised general consent procedures, which require no prior no tice to the Board unless the size of the investment exceeds the greater of $15 million or one percent of the bank holding company’s equity capital. As a prudential measure, the amendment provides that if a bank holding company holds more than 25 percent of the voting shares of a private sector nonfinancial company, there must be another larger shareholder of the company unaffiliated with the bank holding company. In addition, the investment must be held through the bank holding company, unless the Board specifically permits the investment to be held through a bank or bank subsidiary. These measures will add to the menu of options available to banking organizations for managing exposure to heavily indebted developing countries. Enclosed — for depository institutions, bank holding companies, and others who maintain sets of the Board’s regulations — is the complete text of the amendment to Regulation K, effective Feb ruary 24, 1988, which has been reprinted from the Federal R egister of February 24; copies will be furnished to others upon request directed to the Circulars Division of this Bank (Tel. No. 212-720-5215 or 5216). Questions regarding Regulation K may be directed to our Foreign Banking Applications Division (Tel. No. 212-720-5878). E. G e r a l d C o r r ig a n , President. Board of Governors of the Federal Reserve System INTERNATIONAL BANKING OPERATIONS AM EN D M EN T TO REG U LA TIO N K (e ffec tiv e F e b ru a ry 2 4 , 1 988) action was the first result of its review of the area of debt-for-equity swaps. 12 C S Part 211 FR Consequently, the Board requested public comments on the revision to the [Reg. & 0©e£t©t Me. R=O610] ; regulation and stated it would consider the comments as part of its continuing Snt@raat8@naS BanfeSng ©p^rattens evaluation of Regulation K. SUPPLEMENTARY INFORMATION: On fR©gylat8@n K > The Board received 23 public August 12,1987, the Board amended February 18,1988, comments: 18 from banks or bank Regulation K to permit investments to be holding companies, three from banking made through debt-for-equity swaps in Adiwev: Board of Governors of the trade groups, and two from members of up to 100 percent of the shares of foreign Federal Reserve System, Congress. The comments focused nonfinancial companies, subject to generally on five areas; acquisition of certain limitations. Under the August . private sector companies; the 10-year A6T10K: Final rule. ’ ' revision to the regulation, a bank holding period; the requirement that the holding company may exchange SUMMARY: After further review of its nonfinancial company be held through sovereign debt obligations of a heavily regulations and consideration of public the holding company; the general indebted developing country for equity comments,the Board has revised , r. interests in companies being privatized consent procedures of Regulation K for Regulation. K governing foreign •.•/••• making investments; and use of private by the government of the country. An investments of U.S, banking ... - ... sector debt as well as sovereign debt in investment under the August regulation organizations. The new regulation . ' must be made through a bank holding making the investments. In addition, permits investors to acquire up to 40 other technical comments and requests company, rather than a bank, and is percent of the shares of foreign for clarification were received. required to be divested within five nonfinancial companies where After further review of the regulation years, unless the time were to be sovereign debt obligations are being and consideration of the public extended for up to another five years. exchanged for ownership interests in the Loans made to the company are treated comments, the Board has amended companies. The Board also revised the Regulation K to provide bank holding as investments for purposes of the regulation to permit companies acquired investment procedures of Regulation K. companies with greater flexibility in through debt-for-equity conversions in The company may not bear a name making debt-for-equity investments in heavily indebted developing countries to similar to that of the banking heavily indebted developing countries. be held for up to 15 years and organization and the bank holding The following are the major changes to liberalized the investment procedures company may not provide to the ‘ > the regulation: /_ ;. .. for such investments. company any confidential information —A U-S. banking organization may obtained from bank customers that are . (EFFECTIVE DATE: February 24,1988. invest in up to 40 percent of the shares engaged in the same or related lines of : FOR FURTHER INFORM ATION CONTACT: . of or other ownership interests in a business. In addition, the Board Ricki Rhodarmer Tigert, Assistant private sector nonfinancial company cautioned that, consistent with prudent General Counsel (202-452-3428); through conversion of sovereign debt banking practice, an investor should Kathleen O’Day, Senior Counsel (202/ obligations in a heavily indebted carefully evaluate the soundness of an 452-3786), Legal Division; Michael G. developing country; Martinson, Assistant Director (202/452- investment before it is made, and that —If the U.S. banking organization officer and director interlocks should be 3840); or James Keller, Manager, acquires more than 25 percent of the kept to as few as administratively International Banking Applications voting shares of a nonfinancial feasible to oversee the investment. (202/452-2523), Division of Banking company, another shareholder (or a The Board stated that its August Supervision and Regulation, Board of control group of shareholders) would FEDERAL RESERVE SYSTEM Governors of the Federal Reserve System, Washington, DC 20551. For the hearing impaired only, Telecommunication Device for the Deaf (TDD), Earnestine Hill or Dorothea Thompson, (202/452-3544). , - 7 PRINTED IN NEW YORK, FROM FED ERAL REG ISTER, VOL. 53, NO. 36, pp. 5358-5363. For this Regulation to be complete, retain: 1) Regulation K pamphlet, revised effective October 24, 1985. 2) Amendment effective July 8, 1986 (included in slip sheet dated Septem ber 1987.) 3) This slip sheet. [Enc. Cir. No. 10228] foreign control. The amount of equity be required to own a larger block of being made available for investment shares; • under privatization programs is small in —The U.S. banking organization that relation to the amount of sovereign debt makes an investment in a company outstanding. Therefore, the commenters under the revised regulation would also be permitted to provide loans or stated that, in order for the regulation to be meaningful, private sector companies other financing in amounts up to 50 must be eligible for investment. A percent of the total loans and extensions of credit to the affiliated ! number of commenters also stated that limiting debt-for-equity swap company; -' investments to companies being —'The U.S. banking organization would privatized places U.S. banking be permitted to hold the investment organizations at a competitive for up to two years after the end of the disadvantage compared to nonbanks period during which die debtor and foreign banks, which are not subject country restricts full repatriation of to these limits. Moreover, some the investment, as long as the total commenters said that limiting the holding period is not more than 15 participation of U.S. banking . years; . , • organizations to public sector “ The investment would be required to companies will heighten competition for be held through the bank holding the few good public companies being company and not the bank or its : privatized, making the investments subsidiary, unless the Board permits a economically less attractive. particular investment to be held Some commenters stated that even if controlling investments in nonfinancial through the bank; and private sector companies are not “ The general consent limit of Regulation K (that is, the amount that permitted, noncontrolling investments in greater than 20 percent of the shares of a an organization may invest without private sector company should be giving prior notice to the Board) for allowed. Several commenters suggested debt-for-equity swap investments permitting noncontrolling investments to under the revised regulation is increased to the greater of $15 million be made in up to 50 percent of the or one percent of the investor’s equity shares of a company; others suggested that the permissible investment should capital. be at least 25-30 percent of the shares of A more detailed discussion of each a company. The reasons advanced were aspect of the Board's action is provided that allowing a greater than 20 percent below. investment would permit the use of equity accounting; would put the Investments in Private Sector banking organization into a better Companies position to supervise the investment; As noted, the Board’s action in August and would make it easier to divest the company because potential investors was limited to investments in public would be more likely to want to acquire sector companies that were being . a block of shares that could give them privatized by the government of the influence over the company. These foreign country. Most of the comments commenters also suggested that, were favorable on the Board’s decision because of the special circumstances to provide flexibility to banking surrounding debt-for-equity investments organizations in dealing with their and their temporary nature, there should holdings of sovereign debt obligations be greater leeway for a bank holding by permitting the purchase of these company investor to take part in the companies. The commenters, however, also stated that the regulation did not go affairs of the company without the investors being considered to control the far enough and that such flexibility should be extended to allow acquisition company. The Board has revised the regulation of companies that are in the private sector. Various reasons were advanced to permit a bank holding company to hold up to 40 percent of the shares of in support of this proposal. Most commenters noted that there are (whether voting or nonvoting) or other not a significant number of opportunities ownership interests in private sector for investment in privatizations because nonfinancial companies through debtmany governments are reluctant to give for-equity investments in heavily indebted developing countries. The up control of important state-owned Board determined that this level of enterprises and to allow important equity ownership is viewed as large sectors of the economy to pass into 2 enough to give U.S. banking organizations a significant stake in the company, but would also a assure that there would be substantial participation by other investors. However, it is not contemplated that the U.S. banking organization would have the chief management or operating responsibility for the nonfinancial company. This approach responds to the interest some U.S. banking organizations have expressed in making more than just portfolio investments in private sector nonfinancial companies, while also helping to assure that banking organizations do not assume ail of the risks associated with operating and controlling commercial and industrial companies. By increasing the scope of investments that U.S. banking organizations may make, the liberalized regulation would enable them to diversify further their asset portfolios. The Board placed several conditions on a bank holding company’s authority to make these sizeable equity investments in nonbank companies because it continues to believe that there are significant risks in operational investments in foreign nonfinancial businesses with which bank management has little or no expertise or experience. In this regard, the Board noted that a number of banks have indicated that they are not interested in operational control over such companies and few banks have sufficient local staff to be in a position to exercise management control or supervision over a variety of business concerns. The risks associated with these investments may be exacerbated by the acquisition of the investment in a debt-for-equity swap environment where the investor may not devote the same care and attention to the acquisition because the investment is being made with funds already committed to heavily indebted countries. The experience of the Board has been that banking organizations tend to stand behind investments they have made in order to protect their own reputations in the funding markets. In an effort to address these concerns, the regulation requires that, if a bank holding company owns more than 25 percent of the voting shares of a private sector nonfinancial company, then another shareholder (or control group of shareholders) must control a block of shares that is larger. This requirement serves a dual purpose. First, it demonstrates that there is another substantial equity holder with capital at risk. Second, because there would be a larger shareholder, the bank holding company would not bear sole operational responsibility for the company. Restricting debt-for-equity swap participation by an individual banking organization to a minority position would also help assure that this investor would not be put in a position where additional investments would be required to prop up an ailing enterprise. Restricting the level of ownership would also make it less likely that a local government might hold the U.S. organization responsible for problems caused by the nonfinancial company. The regulation also places a limit on the amount of financing that may be provided by a bank holding company to private sector companies acquired through debt-for-equity swaps in which the bank holding company owns 20 percent or more of the voting shares (that is, above the level of share ownership in nonfinancial companies already permitted under Regulation K). Loans or other forms of financing (such as guarantees or letters of credit) are limited to not more than 50 percent of the total loans or other extensions of credit to the affiliated company. The 1 purpose of this provision is similar to ' the limitation on share ownership. Because the nonfinancial company may not rely on its U.S. affiliates for all of its funding, at least half of the company’s credit must be obtained in the marketplace, which would help assure that the company is creditworthy. Such funding support from the bank, consistent with the requirements of section 23A of the Federal Reserve Act, would be permitted only where the investment is made through a direct holding company subsidiary. If, in special circumstances the Board were to permit an investment to be made through the bank or a subsidiary of the bank, additional support to the company in the form of financing by the bank would not be permitted in order to reduce risk to the bank. In assessing exposure to a company, it is realistic to look at the full range of a banking organization’s financial commitments to the company. Loans would be substantially at risk, just as equity investments would be and, where an ownership interest is involved, an arms’ length credit judgment is difficult to make. Participation in major corporate decisions. The regulation provides that the bank holding company may have membership on the board of directors or on management committees of the nonfinancial company in which it invests through a debt-for-equity swap i in proportion to the percentage of voting I shares of the company that the bank holding company owns. In contrast with present rules on portfolio investments under Regulation K, which generally contemplate a relatively passive interest, bank holding companies could have an important voice in management of the companies through such vehicles as representation on boards of directors. In addition, there are no restrictions in the regulation on the ability of the bank holding company investor to veto major corporate actions, such as the sale or encumbrance of substantially all of the assets of the company, major mergers and acquisitions, or a dilution of shares, that could threaten the value of its investment. As noted in the comments, participation in the corporate affairs of the nonfinancial company to the extent described would allow the U.S. bank * holding company to protect its ' investment without being in the position of exercising sole operational control over or being responsible for the company. • Holding Period * Regulation K as revised in August permitted debt-for-equity investments in nonbank companies to be held for a period of five years with the possibility of an extension for an additional five years. All comments received stated that the time period for divestiture is too short and asked that the holding period be long enough to permit the investor to maximize recovery on investments. The comments noted that all of the debt-forequity programs in heavily indebted countries include restrictions on repatriation of dividends and on the investor’s ability to sell the investment to local investors and repatriate the capital. These restrictions extend beyond the initial five years provided in the Board’s regulation and in many cases beyond the 10-year maximum 3 available with extensions under the Board’s regulation. After further review, the Board determined to permit investments made under the revised regulation to be held for the lesser of 15 years or two years beyond the end of the period established by the country restricting repatriation of the investment. This liberalization would apply to investments in public sector companies being privatized as well as to private sector companies. Extending the period to 15 years would respond to the concerns of those banking organizations that believe that divestiture will be difficult and costly if required within the period during which repatriation of the capital investment is restricted by the foreign country. Under the debt-for-equity programs of the major Latin American countries 13 years is currently the longest period during which repatriation of the investment is restricted. As a result, a maximum holding period of 15 years (or two years beyond the restricted period if shorter than 13 years) should give U.S. banking organizations greater opportunity to sell such investments. The Board continues to emphasize that investments in nonfinancial companies are intended to be temporary, particularly where they extend beyond the periods currently permitted for investments made under authority to collect on debts previously contracted, the longest of which is five years extendable to 10 years. Therefore, banking organizations will be required to report to the Board on their plans for divestiture of debt-for-equity investments on the tenth anniversary of the acquisition of an investment and :.* two years before the end of the holding period. This requirement would apply to investments both in private sector companies and in public sector companies being privatized. Such requirements would not apply to otherwise permissible investments even where the investments resulted from debt-for-equity swaps. Structure for Investments In its amendments to Regulation K in August, the Board required that the debt-for-equity investments in nonfinancial companies be held through the bank holding company and not investments where funds are already holding company might gain any profits from the investments, it is also the bank committed to a country, a percentage of holding company that would be exposed the investor’s equity capital is a reasonable measure of the need for to any potential losses, thereby review of the investments. This new protecting the bank. limit would also apply to investments As to the effect of section 23A, it is made under the previous amendment to intended to protect the bank from being Regulation K permitting controlling, pressured to make potentially risky loans to nonbank affiliates based on the investments to be made in public sector companies. affiliate relationship rather than the Under the liberalized regulation, prior creditworthiness of the affiliated notice to or the specific consent of the borrower. The Board determined that the protection afforded by section 23A is Board will be required where (1) the amount to be invested exceeds the entirely appropriate in the context of a greater of $15 million or one percent of bank lending to foreign commercial and the investor’s equity capital after the industrial affiliates. With respect to the deduction of goodwill: (2] the country’s tax issues, consultations with staff of debt-for-equity swap program requires the Treasury Department suggest that the investor to invest new money in whether a banking organization would addition to swapping debt obligations, want to hold a nonfinancial investment and then only if the new money portion under the bank, as opposed to the bank holding company, solely for tax reasons, of the investment exceeds $15 million: or would very must depend on the i (3) the investment is to be made through an insured bank or its subsidiary. circumstances of the organization. Use o f private sector debt. The Accordingly, the Board required that investments by bank holding companies Board’s August revision to Regulation K provided that the debt that is eligible to acquired through debt-for-equity swaps be swapped is sovereign debt of the generally be held through the bank heavily indebted developing countries. holding company. However, the Board will consider requests for exemptions on A number of commenters asked that all a case-by-case basis where an applicant debt eligible for swapping under the various country programs should also be demonstrates some special need to hold eligible under the Board’s regulations. a nonfinancial investment under the They stated that some country programs bank, as, for example, in connection restrict the debt eligible for swapping with local legal requirements that and that the Board should not impose such a structure. disadvantage U.S. banking Investm ent procedures. In August, the organizations by further restricting the Board did not change the investment debt eligible for use. Rather, they stated procedures of Regulation K for debt-forthat banking organizations should have equity swaps. Several banks that the flexibility to swap any type of debt, commented on the Board’s revision to regardless of the sector of the borrower. Regulation K asked for an increase in Although the Board considered these the maximum investment under the comments, it determined that the general consent procedures from regulation should continue to permit the approximately SIS million to some use only of sovereign debt The Board higher figure, such as a percentage of began its review and liberalization of capital, and for expedited procedures for debt-for-equity investments in order to debt-for-equity investments. provide banks with flexibility in dealing The Board determined that additional The Board determined that these with their holdings of sovereign debt assertions do not present a compelling flexibility should be available in the and continues to believe that this is an case for permitting nonfinancial . investment procedures for debt-forappropriate limitation. This is especially investments to be held by the bank. As equity swaps. The regulation grants the true in light of the fact that banking to the issue of preventing the bank from Board’s general consent for investments organizations already have other reaping profits from the investment,, that do not exceed the greater of $15 authorities to collect on debts previously whether the bank shares in any profits million or one percent of the equity of contracted where the debt is in default. the investing bank holding company. from the investment is entirely within Sovereign debt does not fall within this The Board determined that, in the the control of the bank holding category and therefore requires through a subsidiary of the bank because of the potential risks to the bank from investments in commercial and industrial companies. The Board observed that the form of ownership was intended to erect a barrier between the bank and the nonbanking activities in several ways: by isolating the bank as much as possible from the activities of the nonfinancial company: by making clear that the federal safety net does not apply to the nonbanking activity: and by taking advantage of the restrictions of section 23A of the Federal Reserve Act, which apply as a matter of law to transactions between banks and affiliated nonbanks. Moreover, the approach is in keeping with the Board’s position in other contexts that nonbanking activities should generally not be conducted through the bank. The reasons that led the Board to conclude that investments in public sector nonfinancial companies being privatized should be made through the bank holding company and not the bank apply as well to investments in private sector companies. However, a number of commenters on the August revision to Regulation K contended that transferring the debt to be swapped from the bank to the holding company raises a number of problems. They stated that the bank would record an immediate loss on the transfer but the holding company would reap all of the profits from the investment. They also argued that the application of the collateral requirements of section 23A of the Federal Reserve Act to loans by the bank to a subsidiary of the holding company would serve as a disincentive to debt-for-equity investments. In addition, several commenters suggested that there are certain tax benefits to holding the investments under the bank and that local legal requirements may make it more advantageous to hold the investments through the bank. company. Moreover, although the context of making debt-for-equity 4 the money is actually received. alternative approaches, such as the Any banking organization considering revised regulation. 1the use of equity accounting for Some commenters also requested investments made through debt-forclarification of what constitutes equity swaps in heavily indebted sovereign debt. It is contemplated that countries should carefully evaluate sovereign debt includes debts owed to or fully guaranteed by governments and whether that method of accounting would result in an accurate statement of their agencies and instrumentalities. D efinition o f “in v e s tm e n tM its In the income and capital of the banking August amendment to Regulation K the organization. Board defined the term "investment” for Other Comments purposes of the Board’s procedures for prior notice and- review of investments ~ 7 Several requests for clarification of to include extensions o f credit by the ' 71 the procedures for debt-for-equity investing bank holding company or its ' investments were received. Debt-foraffiliates. This approach gives the Board equity investments may continue to be an opportunity to examine the level of a made under other provisions of U.S. banking organization’s financial , Regulation K. The requirements of support for a foreign company from a ." 1211.5(f) must be followed only if the safety and soundness perspective where investment would not otherwise be permitted under | Z11.5 (cj and (d) of the amounts are large. The Board ‘ determined that this requirement should Regulation K. Similarly, any investment apply to all debt-for-equity investments, acquired through a debt-for-equity swag must be divested only if it is not . including those in private sector otherwise permissible for the bank nonfinancial companies. A ccounting fo r debt-for-equity investm ents. Under Generally Accepted holding company to own at the end of the divestiture period. The investments permitted by the Accounting Principles (GAAP) a U.S. revised regulation may be made through banking organization that holds 20 an Edge corporation subsidiary of a percent or more of the shares of a bank holding company as long as the . company should generally use Edge corporation is not a subsidiary of consolidation or equity accounting to an insured bank. reflect in its income statement undistributed earnings as well as Regulatory Flexibility Analysis dividends received from the company. However, GAAP also provides that the , Pursuant to section 605(b) of the Regulatory Flexibility Act (Pub. L. 96cost method of accounting should be used where there are severe restrictions 354; 5 U.S.C. 601 e ts e q .} , the Board of Governors of the Federal Reserve on the ability of the organization to realize income from, or the principal of, System certifies that the amendment an investment, or where the investment will not have a significant economic impact on a substantial number of small is likely to be temporary. It appears that some banks want to be entities that would be subject to the regulation. The amendment would able to invest in 20 percent or more of the shares of nonfinancial companies in liberalize existing regulations and order to be able to use equity accounting affects only those banking organizations engaged in international banking. It for the investment, even though the would not have any particular effect on investment would be temporary and small business entities. would be subject to restrictions on The Board has determined that the repatriation of investments and provisions of section 553(b) of Title 5, dividends. In fact, some commenters cited the ability to use equity accounting United States Code, with respect to deferred effective date are not as one of the reasons why the Board necessary with respect to this revision should permit larger percentage investments in nonfinancial companies. to Regulation K. As noted above, this In contrast, other banking organizations amendment liberalizes the investment restrictions of the regulation. An intend to use cost accounting under which income is recognized essentially immediate effective date will allow in the same accounting period in which banking organizations to begin to make 5 investments under the revised provisions upon publication in the Federal Register. list of Subjects in 12 CFR Part 211 Banks, Banking. Federal Reserve System, Foreign banking. Investments, Reporting and recordkeeping requirements. Export trading companies, Allocated transfer risk reserve. Reporting and disclosure of international assets, Accounting for fees on international loans, Investment made through debt-for-equity conversions. For the reasons set forth above, the Board amends 12 CFR Part 211 as follows; PART 211—INTERNATIONAL BANKING OPERATIONS 1. The authority citation for Part 211 continues to read as follows: Authority: Federal Reserve Act (12 U.S.G. 221 e t sag.); Bank Holding Company Act of 1956, as amended (12 U.S.C. 1841 e t seq .}\ the International Banking Act of 1976 (Pub. L. 95369); 92 Stat. 607; 12 U.S.C. 3101 e t s e q .); the Bank Export Services Act (Title H, Pub. L 97290. S8 Stat. 1235); and the International Lending Supervision Act (Title IX, Pub. L 98181,07Stef. 1153,12U.S.C. 3801 e ts e q .) . unless otherwfs® noted. . • 2» Section 211.5 is amended by revising paragraph (f) to read as follows. § 211 .i investments and activities abroad. 6 it * . ’ *■** . . . (f) In vestm en ts m a d e through debtfor-equity con versions— (1) D efinitions . For purposes of this paragraph: (i) “Eligible country” means a country that, since 1980, has restructured its sovereign debt held by foreign creditors, and any other country the Board deems to be eligible; (ii) "Equity" includes common stockholder's equity and minority interests in consolidated subsidiaries, less goodwill; . (iii) "Investment” has the meaning set forth in § 211.2(i) of this regulation and, for purposes of the investment procedures of this paragraph only, shall include loans or other extensions of credit by the bank holding company or its affiliates to a company acquired pursuant to this paragraph; (iv) "Loans and extensions of credit” means all direct and indirect advances of funds to a person made on the basis of any obligation of that person to repay the funds. (2) Perm issible investm ents. In addition to investments that may be made under other provisions of this section, a bank holding company may make the following investments through the conversion of sovereign debt obligations of an eligible country, either through direct exchange of the d^bt obligations for the investment or by a payment for the debt in local currency, the proceeds of which are used to purchase the investment: (i) Public sector companies. A bank holding company may acquire up to and including 100 percent of the shares of (or other ownership interests in] any foreign company located in an eligible country if the shares are acquired from the government of the eligible country or from its agencies or instrumentalities. (ii) Private sector companies. A bank holding company may acquire up to and including 40 percent of the shares, including voting shares, of (or other ownership interests in] any other foreign company located in an eligible country subject to the following conditions: (A) A bank holding company may acquire more than 25 percent of the voting shares of the foreign company only if another shareholder or control ' group of shareholders unaffiliated with the bank holding company holds a larger block of voting shares of the company; (B) The bank holding company and its affiliates may not lend or otherwise extend credit to the foreign company m amounts greater than 50 percent of the "v total loans and extension of credit to the foreign company; and v . . J c ' (C) The bank holding company’s representation on the board of directors or on management committees of the foreign company may be no more than proportional to its shareholding in the ' foreign company. . - (3] Investm ents b y bank su bsidiary o f bank holding company. Upon application, the Board may permit an investment to be made pursuant to this paragraph through an insured bank subsidiary of the bank holding company where the bank holding company demonstrates that such ownership is necessary due to special circumstances such as the requirements of local law. In granting its consent, the Board may impose such conditions as it deems necessary or appropriate to prevent adverse effects, including prohibiting loans from the bank to the company in which the investment is made. (4] D ivestiture—[i] Time lim its fo r ■: divestiture. The bank holding company shall divest the shares of or other ownership interests in any company acquired pursuant to this paragraph (unless the retention of the shares or other ownership interest is otherwise permissible at the time required for divestiture] within two years of the date on which the bank holding company is permitted to repatriate in full the investment in the foreign company, but in any event within 15 years of the date of acquisition. (ii] Report to Board. The bank holding company shall report to the Board on its plans for divesting an investment made under this paragraph no later than 10 years after the date the investment is made if the investment may be held for longer than 10 years and shall report to 6 the Board again two years prior to the final date for divestiture, in a manner to be prescribed by the Board. (iii) O ther conditions requiring divestiture. All investments made pursuant to this paragraph shall be subject to paragraphs (b](3](i) (A) and (B] of this section requiring prompt divestiture (unless the Board upon application authorizes retention) if the company invested in engages in impermissible business in the United States. (5) Investm ent procedures—[\) General consent. Subject to the other limitations of this paragraph, the Board grants its general consent for . -investments made under this paragraph if the total amount invested does not exceed the greater of $15 million or one percent of the equity of the investor. (ii) All other investments shall be made in accordance with the procedures of paragraph (c) of this section requiring prior notice or specific consent , (0) Conditions —(i) Name. Any * . , company acquired pursuant to this paragraph shall not bear a name similar to the name of the acquiring bank holding company or any of its affiliates. ,(ii) Confidentiality. Neither the bank holding company nor its affiliates shall provide to any company acquired ■ pursuant to this paragraph any confidential business information or other information concerning customers that are engaged in the same or related lines of business as the company. Board of Governors of the Federal Reserve System, February 18,1988. William W. Wiles, S e c re ta r y o f th e Board. (FR Doc. 88-3828 Filed 2-23-88; 8:45 am] SiUJNG CODE 8210-01-53
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