Wednesday, June 30, 2010

Omani Law Compliance Reminder: Increased Capitalization Requirements and Rights Offerings

In response to the global financial crisis of 2008, the Central Bank of Oman issued a circular in June 2008 requiring Omani financing and leasing companies to comply with the following capitalization requirements:

  • By June 2009, each Omani financing and leasing company must have increased its capital reserves to at least OMR 10 million and maintain such minimum reserve amount at all times going forward; and
  • By June 30, 2012, each Omani financing and leasing company must have increased its capital reserves to at least OMR 20 million, and maintain such minimum reserve amount at all times going forward.
Understanding that many Omani financing and leasing companies initially did not satisfy the OMR 20 million capitalization requirement, the Central Bank of Oman has encouraged Omani financing and leasing companies to conduct incremental capital raises each year, or otherwise periodically, in order to facilitate an orderly and less burdensome capitalization process. The heightened capitalization of Omani financing and leasing companies would then serve to strengthen their financial positions, augment their growth plans, and expand their business operations.

As we approach the two-year anniversary of the issuance of this circular – and two years from the deadline to meet the OMR 20 million reserve requirement – this article highlights one way Omani financing and leasing companies can meet their reserve requirements: rights offerings.
In order to satisfy the Central Bank of Oman’s capitalization requirements, Omani financing and leasing companies should consider, among other options, conducting one or multiple rights offerings in amounts sufficient to satisfy any shortfall.

Pursuant to a typical rights offering, an Omani financing and leasing company, often with the assistance of a bank, distributes to its existing stockholders the right to subscribe to newly issued stock, possibly at a discount from the price at which the stock later may be offered to the public. Stockholders who do not exercise their right to purchase the offered stock then typically would be diluted by the offering. The company conducting the rights offering also may seek to obtain a “Standby Commitment” from the bank conducting the rights offering, under which arrangement the bank would agree to purchase any stock not subscribed to by the stockholders.