Bank recapitalisation stares at Sebi hurdles

Bank CFOs may meet next week to discuss minimum public shareholding and takeover rule issues

The Centre's Rs 23,000 crore recapitalisation plan for public sector banks could run afoul of regulations of the capital market regulator such as minimum public shareholding (MPS) norms and creeping acquisition norms under the takeover code.

As a result, the banks might either need to knock the doors of the Securities and Exchange Board of India (Sebi) for special exemptions individually or structure their share issues in such a way that the promoter holding does not go up substantially. The second option would require active participation from public shareholders, which looks difficult in the current scenario.

A meeting of bank chief financial officers, scheduled next week, is likely to discuss the issue in detail and arrive at bank-specific solutions, according to people familiar with the development.

The sources added that a note was initiated by the Reserve Bank of India a few weeks ago, asking Sebi to grant a blanket waiver for the state-owned banks from these regulations, as they might be repeatedly violated in the coming months. However, no announcement in this regard was made by Sebi yet.

Analysts say capital requirements of public-sector banks are much more than Tuesday's allocation by the government.

According to an analysis of data provided by BS Research Bureau, in eight of 13 banks, which figured on the capital infusion list on Tuesday, a fresh issue at current price levels would take the promoter holding over the Sebi cap of 75 per cent. These include United Bank of India (UBI), Central Bank of India, UCO Bank, Indian Overseas Bank (IOB), Bank Of India, Syndicate Bank, Corporation Bank, and Dena Bank.

In three of these - UBI, Central Bank and UCO - the government stake has already exceeded 75 per cent. These banks cannot issue fresh shares, except to comply with the minimum public shareholding norms according to regulations.

Further, under the takeover regulations, promoters increasing their holding by more than five per cent in a financial year would attract open offer.

Three more banks - Canara Bank, Union Bank and Punjab National Bank, though in compliance of the minimum public shareholding norms - would fail the Sebi test of creeping acquisition, as the proposed capital infusion exceeds five per cent of the current market capitalisation.

These banks would need to apply to Sebi for exempting the government from the open offer provisions.

That leaves State Bank of India and Allahabad Bank as the lucky couple that can receive the additional funds without worrying about Sebi regulations.

"Sebi's guidelines are very clear. You can't go for a fresh issue of shares, when you are not in compliance with listing conditions, which includes minimum public shareholding norms," said Prithvi Haldea, chairman, Prime Database.

At least some of these lenders might be looking at the option of a rights issue, where the public shareholders also get a chance to participate.

"There is thinking in the government that the amount of capital infusion could become the promoter contribution in a possible rights issue. This might work in cases where public shareholders are interested in increasing their stake. Several rounds of capital infusion by the government have diluted the stakes of public shareholders. But, this might not work in banks where investor interest is low," said a compliance professional, who is helping the banks with these issues.

The worst-affected of the lot is Indian Overseas Bank, in which the proposed capital infusion of Rs 3,101 crore amounts to 58 per cent of the total market capitalisation. Only a couple of months ago, the bank brought down its promoter holding to 73.58 per cent by making a qualified institutional placement. This helped the bank comply with a Sebi deadline set in October. The market regulator had given 12 months to IOB to bring down promoter stake to 75 per cent, when the government infused Rs 2,009 crore through the preferential allotment route. This issue breached both the minimum public shareholding norms and the five per cent takeover code limit. Although the bank managed to comply with MPS within the deadline, it is all set to breach it again.

In UBI, the capital infusion amounts to 32 per cent of market cap followed by Dena Bank, where the number stood at 22 per cent.

"It could become an issue for individual banks. But, they (the government) are taking a systemic view. Banks need to be capitalised for the economy to perform, which to my mind is more important at this juncture. Regulators need to say these rules do not apply to the state-owned firms, which are in any case in breach of these conditions most of the time," Amit Tandon, managing director, Institutional Investor Advisory Services.