FSC Explains Financial Holding Companies’ Distribution of Cash to Shareholders with Legal Reserve or Capital Reserve

Certain financial holding companies (FHCs) have recently proposed the distribution of cash with legal reserve or capital reserve based on the shareholding ratio of the shareholders. The Financial Supervisory Commission (FSC) has requested FHCs to carefully review the necessity and appropriateness, and submit the proposal to the board of directors for full discussion.
The FSC stated that the financial soundness of financial institutions is critical for the rights and interests of the society and their dividend policies must be based on the conservatism principle to meet the needs for sustainable development. The legal reserve and capital reserve are long-term and stable sources of capital and are used to bear future operation risks. Therefore, the distribution of cash dividends should, in principle, be based on the profits of the current year. The FSC has established related regulations for the distribution of cash with legal reserve or capital reserve by banks, insurance companies, and securities firms.
The FHCs are responsible for ensuring the sound operations of their banking, insurance, and security subsidiary companies and bear the ultimate risks for the operations of the subsidiary companies. Their dividend policies must also be based on the conservatism principle. If they plan to distribute cash from the legal reserve or capital reserve based on the shareholding ratio of the shareholders, they shall analyze the detailed reasons why undistributed earnings are insufficient to pay cash dividends due to insufficient undistributed earnings, carefully evaluate the necessity and appropriateness, properly arrange enhancement plans for the impact on the financial and capital structure, and submit the plans to the board of directors for full discussion.
The FSC will formulate related regulations and principles to provide consistent guidelines for FHCs’ distribution of cash with legal reserve or capital reserve in the future.