PSBs oppose stake dilution via ETF

Lenders wary of the move as they see it clashing with fund-raising plans

Public sector banks (PSBs) are resisting the Central government’s move to include them in the new exchange-traded fund (ETF).

According to sources, all the state-owned lenders have expressed concern that divestment by the government in the proposed new ETF could impact their public sector character and complicate capital-raising plans.

After the success of the first Central Public Sector Enterprise (CPSE) ETF, the government is looking to launch an ETF with banks and other public sector undertakings (PSUs) as the underlying. Having banks as part of the ETF will entail the government divesting some portion of its holding in them.

Most banks have lined up fund-raising plans. This could lead to a dilution of the government stake in them. Further dilution through the proposed CPSE ETF is fraught with the risk of bringing down the government holding below the threshold of 51 per cent, which is required to maintain their public sector character, bank officials have told the government. Bankers have also expressed concerns over clashing with Sebi’s lock-in and cooling-off requirements if the government dilutes any stake in the ETF.

Also, if the Centre decides to launch a fresh tranche of the new ETF, it would result in a further dilution of the government stake.

“We have expressed our reservations over inclusion in the CPSE ETF. According to our initial interactions with Dipam (Department of investment and public asset management) officials, we have understood that the forthcoming ETF would not be a one-time offering as the government plans to launch subsequent follow-on offerings. Although the shareholding of the government looks comfortable for the time being, we should also consider the dilution on account of primary fund raising in the next few months,” said a senior PSB official.

Dipam met all the stakeholders along with fund managers last week to discuss the matter. However, no consensus could be reached in the meeting. 

Dipam officials might call for another meeting in the next two weeks to take a final decision, sources said. 

The fund is being managed by ICICI Prudential Asset Management Company (AMC).

The Centre wanted to rope in PSBs in the forthcoming CPSE ETF to add balance to the fund, which otherwise will be dominated by commodity-related companies. In the existing CPSE ETF, managed by Reliance AMC, three commodity related companies — ONGC, GAIL and Coal India — have a weight of more than 57 per cent.

The initial plan was to include three of the top five PSBs in the ETF. In terms of market capitalisation, State Bank of India, Bank of Baroda, Punjab National Bank, Canara Bank, and Central Bank are the top five state-owned banks.

Analysts say, all the major PSBs currently have primary fund-raising plans to meet capital adequacy norms. Although the top five PSBs have enough capital to meet the rules, they will need more capital to meet the Basel-III norms in the next two years. 

According to the shareholding data, the government has comfort only in State Bank of India (SBI), in which it owns a little more than a 62 per cent stake. SBI is also the largest PSB in terms of market capitalisation. However, in other banks, the position appears to be different. For instance, in Punjab National Bank, for every Rs 310 crore divestment, the government’s stake falls by one per cent. In PSBs like Canara Bank and Oriental Bank the ratio is even lower, thanks to the smaller market capitalisation.