The banks are exploring different ways to reduce the government’s stake, including instruments such as qualified institutional placement, FPO, rights issue, among others
Public sector banks (PSBs), including the ones that the Reserve Bank of India (RBI) pulled out of prompt corrective action (PCA) framework, are set to raise growth capital. This is being done to reduce the government's shareholding in the banks to 75 percent, Business Standard reported.
This move will also help them meet their mandatory 25 percent public float norms of market regulator Securities and Exchange Board of India (SEBI).
Moneycontrol couldn’t independently verify the report.
The regulator had been extending deadlines for the banks to meet this norm on a case-to-case basis, a senior PSB official told the newspaper. But, because of the recent capital infusion, the government stake in most PSBs has exceeded 90 percent. These banks have asked for a two-year grace window to meet SEBI's 25 percent public float norm.
PSBs are exploring different ways to reduce the government's stake, including instruments such as QIP (qualified institutional placement), FPO (follow-on public offer) or rights issue, among others. This exercise might be an uphill battle for banks, especially those under PCA. "It is not going to be an easy task for the government to raise external equity. The banks need to see if there is enough appetite, especially markets remaining volatile ahead of elections," Karthik Srinivasan, Group Head at ICRA, said.
The government holds 95 percent in Kolkata-based Union Bank of India, while in Allahabad Bank, it owns around 91 percent stake after the recent fund infusion of Rs 6,896 crore, according to a senior official at the bank.
Allahabad Bank aims to pare down this stake to 75 percent by October 2020, as per SS Mallikarjuna Rao, its Managing Director and CEO. The bank recently emerged out of the PCA framework.
"By October 2020, public shareholding should be 25 percent. The breach occurred in October 2018, when with the infusion of Rs 1,179 crore, the capital went from around 71.9 percent to 79 percent. The requirement to reduce capital is around Rs 3,800 crore, which we cannot sell in one tranche, and will have go in four to five tranches," Mallikarjuna had said recently.
Other PSBs that just came out of the PCA also have a high government stake. For example, the government holding in Bank of India was 89.07 percent and for Oriental Bank of Commerce, it was 86.17 percent as on February 16. For Bank of Maharashtra, it was about 87.01 percent and for Corporation Bank of India, it was about 86.77 percent as of December 2018.After coming out of the PCA, banks need growth capital to sustain and profit. The latest round of funds by the government will be used in meeting the regulatory requirement. The banks need another $23 billion to sufficiently meet minimum capital standards alone, the latest report by Fitch stated.Subscribe to Moneycontrol Pro and gain access to curated markets data, trading recommendations, equity analysis, investment ideas, insights from market gurus and much more. Get Moneycontrol PRO for 1 year at price of 3 months at 289. Use code FREEDOM.