Holding of shares in group members by otHolding of shares in group members by other group members

Holding of shares in group members by other group members

34. Capital instruments[6] of an ADI, or a member of a group headed by an ADI at Level 2, that are held as direct investments by a vehicle[7] subject to consolidation within the ADI’s financial statements in accordance with Australian accounting standards, may only be included in Tier 1 capital and Tier 2 capital (on both a Level 1 and Level 2 basis, as appropriate) if:

(a) the ADI (or relevant vehicle) did not fund the acquisition of the capital instruments (i.e. acquisition of capital instruments is funded by third parties such as life insurance policyholders or other third-party investors);

(b) the risk and rewards associated with the investments are borne primarily by third parties; and

(c) the ADI can demonstrate to APRA, if required, that decisions to acquire or sell such capital instruments are made independently of the issuer of the capital instruments and in the interests of the third parties who primarily bear the risks and rewards of the investments in the instruments.

35. Direct investments in shares of an ADI by an SPV (e.g. trust) established under a share-based employee remuneration scheme may only be included in the ADI’s Tier 1 capital (on a Level 1 and Level 2 basis, as appropriate) where:

(a) the shares issued to the SPV represent ordinary shares of the ADI;

(b) the amount included in Tier 1 capital is matched by an equivalent charge to profit or loss of the ADI for expensing the issue or funding the acquisition of ordinary shares by the vehicle; and

(c) the ordinary shares issued cannot be converted to payment in another form (e.g. cash).

For the purposes of measuring capital at Level 2, the SPV holding such shares must be excluded from the consolidated group. As a consequence, any associated change in the fair value of the shares held by such an SPV must be excluded from Level 2 capital and risk-weighted assets.