Is supervisory permission required where an institution reduces its own funds by repaying share premium to its shareholders without simultaneously reducing, repurchasing, calling or redeeming the own funds instrument to which the share premium relates?
Would the answer to this question change if the institution would first (have to) convert the share premium to reserves in order for the share premium to become repayable?
Articles 77 and 78 of Regulation (EU) No 575/2013 (CRR) refer to the reduction, repurchase, call or redemption of own funds instruments. Article 26 of the CRR makes a clear distinction between the instrument itself (point (a) of paragraph 1) and the related share premium (point (b)). A similar provision exists for AT1 and T2 (see articles 51 and 62 of the CRR). Based hereon, it does not seem possible to apply articles 77 and 78 of the CRR to "items".
This also seems to be the line of reasoning followed in Q&A 467, albeit in the context of the replacement of instruments by other own funds instruments of equal or higher quality (article 78(1)(a) of the CRR). At the time, the EBA answered that the CRR effectively requires an institution to issue a new own funds instrument to investors. Retained earnings or other CET1, AT1 or T2 items of the institution would not be sufficient to meet the replacement requirement of Article 78(1)(a) of the CRR. The general reference to "other items" would appear to include share premium.
Share premium accounts are only allowed to count as own funds items if the instruments to which they relate themselves meet the eligibility criteria of the CRR. The CRR establishes a very close link between the capital instruments and the share premium related to these instruments. This is further illustrated by Article 30 of Regulation (EU) No 575/2013 (CRR) which states that when the requirements for the classification as CET1 under Article 28 CRR or, where applicable, Article 29 CRR are no longer satisfied, both the instrument and the related share premium account cease to qualify as CET1. A similar provision exists for AT1 and T2 (see Articles 55 and 65 CRR). Based on this, prior supervisory permission for the reduction, redemption or repurchase of share premium accounts is required, also where share premium would first (have to) be converted into reserves in order for it to become repayable. What has been contributed as capital, be it the par value or share premium, may not be reduced, redeemed, called or repurchased (in a matter that is permitted under applicable national law) without the prior permission of the competent authority. Institutions should therefore ask for prior permission not only in case of a reduction, redemption, call or repurchase of an instrument (together with the related share premium), but also in the case of a reduction, redemption or distribution of share premium without a simultaneous reduction, redemption, call or repurchase of the instrument to which the share premium relates.
Update 26.03.2021: This Q&A has been archived in light of the change(s) in Article 77(1)(b) of Regulation (EU) No 575/2013 (CRR).