The Banking Supervision Department is publishing today a draft update of a Proper Conduct of Banking Business Directive no. 332 “Buybacks by banking corporations”. Pursuant to the update, banks will be able to buy back their own securities, subject to complying with certain terms. Until now, the directive prohibited banks from buybacks except in exceptional cases, while the Companies Law allows such a transaction for public companies.

 

A buyback is a transaction in which a corporation purchases equities it issued, thus reducing the quantity of shares held by the public. Buybacks and dividend distributions have a similar effect on the corporation’s capital. However, in contrast to a dividend, a buyback is a specific transaction, without a long-term commitment by the corporation toward shareholders. As such, a buyback provides a specific response to capital surpluses that built up, while maintaining the bank’s capital targets and dividend policy.

 

Supervisor of Banks Dr. Hedva Ber said, “We decided to update the Banking Supervision Department’s Directive on the issue after banks in Israel reached, and even surpassed, the capital targets we had set, and in view of share buybacks by banks being accepted worldwide. We are aware that numerous investors see great importance in a company having the option to buy back its shares, as an alternative to distributing a divided. Against the background of the change, banks will be able to use their profits in a more wide-ranging manner—to extend credit and expand activity, to distribute a divided or to buy back shares.”

 

The draft directive establishes the terms under which the banking corporations will be able to carry out a buy back of their own securities. The terms set in the directive for carrying out a buy back are generally accepted worldwide and are based on guidelines implemented for several years already in various countries. Among other things, it was established that:

 

  • Approval by the Supervisor of Banks is required for the purchase, based on a purchase plan submitted by the bank.
  • The scope of the purchase in a given plan shall not exceed 5 percent of the banking corporation’s issued and paid share capital.
  • The banking corporation shall act in accordance with the safe harbor protection mechanism published by the Israel Securities Authority[1] or another sound mechanism that will ensure it legal protection from claims of using insider information.
  • The purchase offer shall not be directed to a specific group of shareholders (except qualified clients as defined in the directive).
  • The purchase plan shall be approved by the bank’s board of directors.

 

Likewise, the existing limitations on providing credit secured by the bank’s shares were updated, in order to ease the activity of the banking corporation’s customers in the capital market, including activity in equity indices in respect of which the bank’s shares received as collaterals.


[1] A legal opinion of the Israel Securities Authority that details the terms whose existence will serve as a safe harbor with regard to the use of insider information during a buy back. 

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