02 Sep Considerations for the Authorization or Acquisition of Popular Financial Companies and Banking Institutions
Introduction
The purpose of this document is to describe, in an executive manner, the necessary requirements and procedures to: (i) obtain an authorization to operate as a Popular Financial Society (Sociedades Financieras Populares “Sofipo” by its acronym in Spanish) or as a Banking Institution (Instituciones de Banca Múltiple “IBM” by its acronym in Spanish); or (ii) acquire or transfer the shares comprising the capital stock of those Sofipos or IBMs that are currently authorized to operate as each financial institution by the corresponding authorities.
Popular Financial Society
Sofipos are commercial companies incorporated as corporations which, upon their authorization to operate as such kind of financial institucion, they prioritize the raising of deposits and their placement through the provision, among others, of the following services: i) receiving deposits; ii) receive loans and credits from banks, public trusts, international organizations, insurance and surety companies, among others; iii) issue and operate debit cards; iv) grant loans or credits; v) receive or issue payment orders and transfers; vi) make investments in securities; vii) carry out financial factoring operations. Sofipos differ from Banking Institutions mainly by reason of the following:
Traditional Banking
- Services: They generally offer a wide range of financial services, including those that require greater sophistication such as treasury services, large-scale lending, investment banking, foreign exchange operations, international banking services, etc.• Regulation: They are regulated mainly by the Credit Institutions Law (Ley de Instituciones de Crédito).
- Clients: Any individual or company, without distinction of their financial position.
- Geographic Coverage: In some cases banks provide international coverage, with broad national presence.
- Insurance for users in case of losses: Through the Institute for the Protection of Bank Savings (Instituto para la Protección del Ahorro Bancario “IPAB” by its acronym in Spanish), users of savings and deposit account services are insured up to the amount equivalent to 400,000 Investment Units (Unidades de Inversión).
- Capital Stock: Banking Institutions require the contribution of a greater amount in their capital stock than Sofipos, depending on their operations, the least amount shall be equal to 90 million Investment Units.
- Classification by operation levels: There is no classification by operation levels.
- Authorization: They are authorized by the National Banking and Securities Commission (Comisión Nacional Bancaria y de Valores, “CNBV” by its acronym in Spanish)
Sofipos
- Services: They generally offer a range of basic financial services that are accessible to the general public such as: making transfers, receiving deposits, granting loans, etc. Notwithstanding the above, they can provide sophisticated financial services if they are authorized with higher levels of operation.
- Regulation: They are regulated mainly by the Popular Savings and Credit Law (Ley de Ahorro y Crédito Popular).
- Clients: Individuals and small and medium-sized companies seeking access to basic financial services.
- Geographic Coverage: It is usually limited at a regional or local level, however, there are exceptions.
- Insurance for users in case of losses: Through the IPAB, cash depositor users in Sofipos are insured up to an amount equivalent to 25,000 Investment Units (Unidades de Inversión).
- Capital Stock: The Sofipos must contribute a lower amount ofcapital stock than Banking Institutions, which will be determined based on their level of operations, with at least 100 thousand Investment Units to be contributed.
- Classification by operation levels: They are distributed into 4 levels of operation in corcordance with the amount of assets they own.
- Authorization: They are authorized by the CNBV, and require a favorable opinion of a Federation (as such term is described below).
In accordance with article 9 of the Popular Savings and Credit Law (“LACP” by its acronym in Spanish), applicants must submit the application to a Federation (Federación), which are institutions authorized by the CNBV to exercise auxiliary supervision of Sofipos. The purpose of a Federation is to review, verify, and evaluate the resources, obligations and assets, as well as the operations, functioning, control systems and in general, anything that may affect the financial and legal position of the Sofipos. The aforementioned application shall be submitted to a Federation and authorized by the CNBV.
Applicants must submit their application in writing and in duplicate, including, among other requirements, the following information, carrying out the respective actions:
- The description and justification of the general aspects of the project, indicating, among other information, objectives, who will hold a position as member of the board of directors, statutory auditor and members of the audit and credit committees or their equivalent, operations to be carried out, the target market, the geographical coverage and the technological platform to be used.
- The draft of corporate bylaws in compliance with certain requirements provided by the LACP.
- Information regarding the shareholders, their participation in the capital stock, the method of payment, the origin of the resources, financial situation and information on their good reputation and credit history of the shareholders and members of the board.
- The demonstration of the economic solvency of the legal entity that intends to transform into Sofipo and its capacity to comply with the regulation.
- The general operation program that must contain the business strategy.
- The Sofipo organizational chart.
- The proposed name for the corporation and respective permission from the Ministry of Economy or, as applicable, a copy of the application submitted to such governmental authority.
Once the corporation is established, any amendment to its bylaws shall be previously approved by CNBV.
Conversely, existing corporations that intend to transform into a Sofipo must attach to the authorization request, the approval of their governing body to transform into such kind of financial institution, including the amendment of the corporation’s bylaws; and certain financial information.
Upon submission of the authorization request and remittance of the requisite fees, the Federation will have a period of 90 calendar days to render its opinion regarding the admissibility of the request and the CNBV will have a period of 120 calendar days to issue a resolution granting or dismissing the authorization . It is important to mention that the CNBV may require more information to evaluate the viability of the project and, as the case may be, authorize the request.
As consequence of the above, being granted with a license to be able to operate as a Sofipo takes a minimum of 8 months, from the date of submission of the application to the Federation or to the CNBV. This procedure is concluded with theissuance of the resolution by the CNBV. Despite the above, this period is commonly extended due to additionalrequirements of information made by the CNBV, so the authorization process takes, on average, between one and two years.
In accordance with article 32 of the LACP, the CNBV will classify the Sofipos into 4 levels of operations in accordance with the value of its assets.
It should be noted that newly created corporations may only operate under Level I of operations. The Operation Level awarded to the corresponding Sofipo will determine the operations that can be carried out based on the LACP and the General Rules for the Operation of Popular Financial Companies (Reglas de Carácter General para el Funcionamiento de las Sociedades Financieras Populares) .
Requirements to acquire an existent and authorized Sofipo.
In accordance with article 44 of the LACP, any individual or legal person may acquire the shares ofthe capital stock of a Sofipo, through the fulfilment of the following requirements and processes:
a) Acquisition or transfer of more than 5% of the capital stock or granting of a security interest over such percentage.
Individuals and legal entities may acquire or transfer ownership of their shares for an amount greater than 5% of the capital stock of the Sofipo, provided that they request the corresponding authorization of the CNBV, subject to the accreditation of certain requirements, and a favorable opinion Issued by the corresponding Federation addressed to such Sofipo.
b) Acquisition or transfer of more than 20% of the capital stock, obtaining control or granting a security interest over such percentage.
If the purpose is to acquire 20% or more of the shares representing the capital stock of a Sofipo, provide a security interest with an equal or greater percentage of the capital stock, or obtain control of a Sofipo, prior authorization of the CNBV must be obtained.
Such authorization must contain the following information: i) relationship or information of the person or persons who intend to obtain control of the Sofipo, as required by the LACP; ii) list of the directors and executives that would be appointed in the Sofipo, attaching the necessary documentation in accordance with the LACP; iii) general operating plan of the Sofipo, in accordance with the LACP, and iv) strategic program for the organization, administration and internal control of the Sofipo.
In this cases, the Sofipos must appoint at least one independent director for each person or group of people who acquire(s) 20% or more of the capital stock of the corporation or obtain(s) control of Sofipo .
Banking Institution
Banking Institutions (“Institution” or “Institutions”) are corporations authorized by the CNBV, with prior consent of its Governing Board and favorable opinion issued by the Bank of Mexico, to raise resources from the public through various products and then allocate such resources in credit operations. Some of its operations consist in: i) receiving bank deposits; ii) accepting loans and credits; iii) issuing bank bonds; iv) issuing subordinated obligations; v) issuing credit cards, among others.
It is important to note that one of the essential requirements to operate as a Banking Institution and carry out all the operations provided for in article 46 of the Credit Institutions Law (“LIC” by its acronym in Spanish), is to have a minimum capital stock subscribed and paid in national currency for an amount of 90,000,000 UDIs, and this requirement can be increased by the CNBV according to the operations to be carried out by each Institution.
The application document to organize and operate as an Institution shall be addressed to the CNBV, and it must contain a presentation of the project for the organization and operation of an Institution describing:
- Identity of the shareholders.
- Presence in the market.
- Business model and activities to be carried out.
- Geographic coverage and target market.
- Products and services to be offered.
- Purpose of the project and its benefits.
- Medium and long-term growth project.
- Capital structure.
- Technological infrastructure.
- Annexes applicable to the application that support what was stated.
- Specific requests.
Additionally, the CNBV must receive: i) information related to shareholders (with an equal or greater participation to 2% of the capital stock, and the determination of the shareholder who will have Control of the Institution); ii) the draft of the bylaws of the corporation with information on the model and specifications of the formation and operation of the Institution; iii) the strategic business plan and; iv) proof of deposit in guarantee in favor of the Treasury of the Federation.
Requirements for the acquisition of a previously established and authorized Banking Institution
Any individual or legal entity may, through one or more operations, acquire shares of the capital stock of an Institution, as long as such acquisition fulfils the following requirements and processes:
a) Acquisition or transfer of more than 5% of the capital stock or granting of a security interest over said percentage.
Individuals and legal entities may acquire or transfer ownership of their shares for an amount greater than 5% of the capital stock of such coroporation, provided that they receive the corresponding authorization by the CNBV, subject to compliance with certain requirements under the LIC, and the favorable opinion issued by the Bank of Mexico regarding the transfer of the shares.
b) Acquisition or transfer of more than 20% of the capital stock or transfer of control or granting a security interest over such percentage.
If the intention is to acquire 20% or more of the shares representing the capital stock of an Institution, provide a security interest with an equal or greater percentage of the capital stock, or obtain its Control, the authorization issued by the CNBV must be previously obtained, including a favorable opinion issued by the Bank of Mexico.
The authorization request mentioned in the preceding paragraph must contain the following: i) Information about the people seeking to obtain Control, including compliance with the requirements of article 10, section II; ii) Information about the proposed directors and executives, demonstrating that they meet the legal requirements; iii) A general operating plan of the institution, covering the aspects of article 10, section IV; iv) A strategic program for the organization, administration and internal control of the institution; and v) any additional information required by the CNBV.
Acquiring a license to operate as a Banking Institution takes a minimum of 8 months from the date of submission for the application with the CNBV until the resolution is issued by such authority. Despite the above, this period is commonly extended due to the requirements made by the CNBV, so the license process takes, on average,one through two years.
Data protection in a due diligence process.
It is important to note that for the acquisition of a Sofipo or an Institution, in which a due diligence process is carried out and specifically, regarding the transfer of client information in such process, prior authorization issued by the CNBV should be obtained to avoid violating financial secrecy in disclosing information related to the assets or portafolio to be negotiated. The above, in accordance with article 32 Bis 2 of the LACP and 93 of the LIC, respectively.
Antitrust provisions.
Pursuant to the Federal Economic Competition Law (“LFCE” by its acronym in Spanish), concentration is understood to be the merger, acquisition of Control or any act by virtue of which companies, associations, shares, equity interests, trusts or assets in general are brought together. between competitors, suppliers, clients or any other Economic Agents (as this term is defined under the LFCE), so it is essential to evaluate whether a purchase, merger or any other operation through which Control of a financial institution is acquired, requires be notified before the Federal Economic Competition Commission. Based on certain thresholds provided for in the LFCE, we can assess if the operation requires such notification, otherwise, the acquisition cannot be closed until approved by the competition authority, the economic agents participating in the operation could be subject to significant sanctions.
There are a series of business considerations, economic factors, regulatory limits on types and amounts of operations, as well as other regulatory considerations that must be evaluated by comparing the advantages and disadvantages in each case. This is necessary to make a decision between establishing or acquiring a Sofipo or a banking institution in Mexico, which should be analyzed on a case-by-case basis according to the business plan of the interested parties.
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The information contained in this document is of a general nature and it does not constitute legal, financial or other kind of advice. The accuracy, detail, depth and timeliness of the information provided has been verified up to the date of issuance of this document, but its validity in the future is not guaranteed. This document does not replace the official standards or requirements established by the competent authorities, so it is suggested to review the applicable laws and regulations directly with the corresponding regulatory entities when making any request or transaction or seek advice from a specialist.
For more information, please contact our experts in the area of Mergers and Acquisitions, Antitrust and Banking and Financial Law.
Contacts
Azucena Marín Díaz
Mauricio Castillo
Héctor Valladares Laguna
Fionna Folino González