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Govt banks' rights issue may not find investors' appetite

Some banks may still want direct equity infusion from govt

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Despite the asking the public sector banks to opt for a rights issue, some of the banks may still want direct equity infusion from government as they are not sure of investor’s appetite.

The government has budgeted Rs 15,000 crore capital infusion in public sector banks for the current financial year. Unlike last year, when the government and the Life Insurance Corporation infused equity and increased stake, this time the government wanted a rights issue.

However, the proposal asking public sector banks to come out with rights issue to raise fresh capital is likely to fall short of target by a long mile. This is because the current market capitalisation of a government bank is a fraction of their capital requirements.

State Bank of India for instance, country’s largest lender, -- its current market capitalisation is just 8.7% of its assets at the end of March 2011. So even if the bank dilutes its equity capital by 20%, the amount raised by would be equivalent to less than 2% of its assets. In contrast, SBI gross non-performing asset as a proportion of assets was around 5%% at the end financial year 2011-12.

Market participants said the investors sentiments towards PSU stocks took a beating after the Hindustan Copper share sale issue.

“The sentiment towards PSU stocks was dented following the Hindustan Copper’s offer for sale issue which was saved by LIC and public sector banks at the last moment,” said an analyst with domestic broking houses.

The market capitalisation to assets ratio is even poor for second and third tier public sector banks may actually exceed their gross NPA figures. For example, Central Bank of India current market capitalisation is just 2.6% of its assets at the end of FY12. So even if the bank dilutes its equity by 100% in a rights issue, the amount raised may not meet its capital requirements.

Banks will need capital not only to support growth but also to meet the Basel-III guidelines which come into effect from January 1, 2013. Public sector banks – which control over 70% of the market – will need Rs 1.5 lakh crore additional capital to comply with the Basel-III norms, which will be implemented over the next five years.

The implications are clear, the government cannot bank on equity investors –domestic or foreign –to plug the holes in the balance sheets of public sector banks. The ball will ultimately fall in promoter’s court and the government will have fork out money to recapitalise banks. It will be replay of what has happened during the rights issue of Tata Motors (in 2008) and Hindalco Industries (in 2010). In both these instances, non-promoter’s shareholders refuse to subscribe to their part of shares and issues were finally rescued by respective promoters.

The same is happening in Europe where governments are being forced recapitalise and equity markets refuse to pick the tab.

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